Chapter 9 is solely for municipalities who need to delcare bankruptcy. It is not really a liquidation but will provide a level of protection from their creditors. A plan will need to be drawn up which details how the debt will be re-paid. It has to be agreed by both parties. Chapter 9 can be used by entities such as school districts or cities and towns.
The idea behind chapter 9 is to re-negotiate re-payment terms which could include something like a reduction of the balance or decreasing the interest rate at which it is paid back. It is not really intended for the debtors creditors to be able to bring about the sale of any assets. The public obviously has to be taken into account when you are dealing with municipalities to avoid disruption of public services.
If chapter 9 has to be considered then the city’s finances have got out of control. This chapter of bankruptcy is aimed at giving some breathing space to the municipality to allow it to get back on it’s feet with minimum impact to the public. This is usually reserved for government intities who have lost control of their budget.
The advantages of chapter 9 are that the interests of the entity will always come first because of the number of members of the public involved. This means that if a creditor is unwilling to accept a repayment plan and wishes to pursue the company to the detriment of those impacted, a judge can force them to accept the settlement.
A bankruptcy court would have no power to interfere in the running or administration of the company. This means that they cannot impose trustees or asset sales or stop the government body from trying to secure investment to pay off the debt which is obviously more freeing for the entity involved.
Another advantage is that the creditors cannot counter propose with their own re-payment plan which would obviously be biased towards their interests rather than the municipality. A major disadvantage of chapter 9 is the costs incurred. This can run into the hundreds of thousands most of which will be spent on lawyer’s costs even in a simple straightforward case.
Another disadvantage is that the credibility and reputation of the entity involved will be negatively affected and could take years to recover. However, if the plan for re-payment is fair and reasonable then chapter 9 could be the best way forward as a way to secure the agreement of the creditors and move forward.
Chapter 9 is not for the ordinary person on the street and is largely unknown. However, it can represent a lifeline to any struggling government municipality or entity.
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