US cities bankruptcies explained

A city declaring bankrupt seems impossible to most of us, but that’s been happening for years in the United States. The laws of each state determine whether the municipality can declare itself bankrupt, but it’s far more common than you would have thought. You now need more than two hands to count the amount of US cities with bankruptcies filed against them since the worldwide financial crisis hit.

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Bankrupt cities

Under Chapter 9 of the Bankruptcy Code, companies can declare themselves bankrupt. That’s the same with some American cities. Since 2008, 13 cities have declared themselves bankrupt under Chapter 9. These include Detroit (Michigan), San Bernardino (California), Central Falls (Rhode Island) and Boise County (Idaho).

Chapter 9

Chapter 9 bankruptcy is very rare for a city as it’s very difficult for a municipality to get to the point where it has no other option. When a city owes money to its employees, pensioners, and creditors, these debts create a contract. Chapter 9 becomes the only option if the city can’t pay off these financial burdens and has no other choice.

State rules

For most states there are very strict criteria under which a city can declare itself bankrupt. The city’s finances are normally scrutinised and the state governor is often involved with the decision making process. States like Colorado, Oregon and Illinois have very restrictive regulations that only allow certain types of municipalities the bankruptcy option. Some states, for example Georgia and Iowa, totally prohibit cities from declaring bankruptcy.

Federal process

Although the laws of each state allow of disallow a city to enter chapter 9 bankruptcy, the federal government manage the actual process. Before that happens, each city has the right to petition the government to restructure its debts, which is a measure that’s designed to avoid cities entering into Chapter 9.

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