Chapter 9 Bankruptcy in Oklahoma: How Does It Work?

Chapter 9 bankruptcy, also known as municipal bankruptcy, is designed to protect government entities (also called municipalities) that file a bankruptcy case, so that they can reorganize their debts and repay some or all of their outstanding debts. In this article, you’ll learn more about the history of Chapter 9 bankruptcy cases, the types of government entities that qualify to file a bankruptcy case of this nature, bankruptcy case filing requirements, and the municipal bankruptcy filing process.

The History of Chapter 9 Bankruptcy Cases

As previously mentioned, Chapter 9 bankruptcy cases offer the protection of the bankruptcy court to municipalities and other government entities. According to Bankruptcy Basics, the first piece of municipal bankruptcy legislation was passed in 1934 during the Great Depression. Congress was exceedingly careful to ensure that the Tenth Amendment, which guarantees state rights, was not infringed upon. Ultimately, this initial act was ruled unconstitutional by the Supreme Court.

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Congress went on to pass the revised Municipal Bankruptcy Act in 1937. Since then, it has been revised seven times. Between 1937 and 2013, an average of less than ten municipality bankruptcy cases each year are filed. In fact, Detroit is the most well-known municipality to file for Chapter 9 in 2013. At that time, it had the largest municipal debt of an estimated $18.5 billion. In 2015, Fairfield, Alabama was struck hard after U.S. Steel closed part of their facility and Walmart closed a Supercenter. Then, their local transit stopped bus service. Fairfield was in danger of having their water shut off and the county took over their law enforcement efforts. In 2020, Fairfield, Alabama filed for bankruptcy.

While Chapter 9 bankruptcy filings don’t happen often, they are serious occurrences that affect millions of citizens.

Which Government Entities Qualify to File for Municipal Bankruptcy?

Only government entities as defined by the bankruptcy code can file for municipal bankruptcy. According to the bankruptcy code, qualified government entities include:

  • Cities

  • Townships

  • Counties

  • Municipal utility providers

  • School districts

  • Taxing districts

However, there are other eligibility requirements that must be met before an otherwise eligible government entity can file for municipal bankruptcy.

You’ll recall in the previous section that we mentioned how Congress wanted to ensure that the Municipal Bankruptcy Act did not violate the Tenth Amendment, which protects state sovereignty. While the bankruptcy code is federal, not all states allow for a municipal bankruptcy filing to occur with the bankruptcy court. Certain states first require that the municipality work to negotiate with their creditors before attempting to file for bankruptcy. Here are some state examples:

  •  In Oklahoma, any municipality may file for Chapter 9 bankruptcy.

  •  Alabama and Arkansas also allow any municipality to file Chapter 9.

  • Georgia does not allow municipalities to file Chapter 9 for any reason.

  • Montana allows most municipalities to file Chapter 9. The exception is counties. Montana counties may not file Chapter 9.

  •  Pennsylvania requires municipalities to receive state approval before filing for Chapter 9.

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Chapter 9 Bankruptcy Case Filing Requirements 

If a municipality wants to file a bankruptcy case, it must meet four specific requirements.

  1. The municipality must be in a state where filing the bankruptcy case is allowed by state law or where a government officer or organization is allowed by state law to allow the municipality to file the bankruptcy case. Oklahoma municipalities do not need any sort of pre-approval.

  2. The municipality must be insolvent. To be insolvent, the total amount of debts must exceed the combined value of the municipality’s assets.

  3. The municipality must be interested in adjusting its debts.

  4. For certain types of creditors, the majority of the creditors must agree to the municipality filing for bankruptcy, or, as previously mentioned, the municipality must be able to show that a good-faith attempt was made to negotiate or that attempting to negotiate was impractical.

It is important that municipalities are aware of the state laws for filing a bankruptcy case. Failure to understand the laws and requirements, such as whether it is required to first attempt a good-faith negotiation with creditors, could result in the bankruptcy case being rejected by the bankruptcy court. Oklahoma allows any municipality to file for Chapter 9.

Municipal Bankruptcy Filing Process

Like other bankruptcies, Chapter 9 is a voluntary process. The municipality files a petition and submits a full list of creditors. The municipality may be given an extension of time to complete their list of creditors. A bankruptcy judge is not automatically assigned.

Because a municipality is involved, the bankruptcy code is designed to keep the process fair and to do what it can to remove the potential for politicking throughout the process.

The Chief Judge of the Court of Appeals in the location where the municipal bankruptcy is filed will appoint the judges to oversee the case.

Municipal bankruptcies are considerably different from consumer bankruptcy and corporate bankruptcy.

  • The judge cannot interfere with the municipality’s property, revenue, or governmental powers.

  • A trustee is not appointed to monitor the case.

  • Creditors generally cannot force the liquidation of assets.

There are some similarities between municipal bankruptcies, consumer bankruptcies, and corporate bankruptcies.

  • After the bankruptcy forms are filed, an automatic stay is granted to prevent creditors from harassing the debtor.

  • For consumer and corporate bankruptcies involving reorganization and municipal bankruptcies, once the plan is confirmed and the money or assets are turned over as agreed, the discharge is granted to the debtor.

Where to Learn More About Chapter 9 Bankruptcy 

Chapter 9 bankruptcies are incredibly unique since they are reserved for municipalities. Yet, as you have learned, municipalities often do need the protection of the bankruptcy court. To learn more about Chapter 9 bankruptcy in Oklahoma, the Law Offices of B. David Sisson provides free consultations.

Oklahoma municipalities are welcome to schedule a free consultation to learn more about how the bankruptcy code could help stop collection efforts, lower the amount of debt owed by the municipality, and help improve how the municipality operates. Learn whether your municipality may benefit from Chapter 9 and how to get started now.