Depending upon which pundit you listen to, municipal bankruptcy is either a wave about to break over the country or a dull-edged tool to be used only on rare occasions. Since the original legislative enactment of Chapter 9 in 1934, there have been fewer than 650 cases filed. In comparison, since 1980, there have been more than 22 million Chapter 7 and 449,000 Chapter 11 bankruptcies.
Because of the political sensitivity related to the potential municipal oversight by a federal judge, a Chapter 9 petition can only be filed if the municipality is expressly authorized to do so under state law. Section 109(c)(2) of the Bankruptcy Code provides that a debtor must be “specifically authorized, in its capacity as a municipality or by name, to be a debtor under such chapter by state law, or by a governmental officer or organization empowered by state law to authorize such entity to be a debtor under such chapter.” Permission to file Chapter 9 is a statutory patchwork across the country, with some states providing blanket authorization, while others, like Pennsylvania, utilizing a multitiered approach that is dependent upon the particular type of municipality or “class” a city may fall into.
