In difficult economic times, the demands for municipal services increase while revenues from declining property values or decreasing sales tax diminish. For some municipalities or units of local government, the lack of adequate revenues may create a financial disaster. In such a case, a municipality may imitate the private sector and seek protection through a bankruptcy filing. The federal Bankruptcy Code provides a method for a local government to file for bankruptcy; however, state law makes the actual filing exceedingly difficult, if not impossible.
Many people are familiar with the three most common types of bankruptcy filed under Chapters 7, 11, and 13, especially in light of recent high profile bankruptcy filings such as General Motors. However, municipalities cannot seek protection under the traditional bankruptcy chapters because those chapters are reserved exclusively for private individuals and corporations. Instead, a municipality must seek relief under the lesser-known Chapter 9. Although similar to reorganization under Chapter 11, Chapter 9 contains several significant and noteworthy differences. First, and perhaps most importantly, the municipal government must have a specific grant of authority by the state legislature to be a debtor in bankruptcy. This grant of authority cannot be general in nature, but must specifically mention and reference the bankruptcy code.(County of Orange, 183 B.R. 594 (C.D.Cal 1995)) Secondly, the municipality must:(1) have the agreement of its creditors; (2)
fail to obtain an agreement with its creditors after good faith negotiations; (3) show that negotiations would be impractical; or (4) reasonably believe that a creditor will attempt to obtain a preference as the term is defined by the Bankruptcy Code.
Until July 6, 2009, only one Illinois local government -- Slocum Lake Drainage District of Lake County -- had filed for bankruptcy in Illinois in the previous twenty years.(Slocum Lake Drainage District of Lake County, 336 B.R. 387 (N.D.Ill. 2006)) However, on the creditors’ motion, the bankruptcy court dismissed Slocum Lake’s bankruptcy petition thereby denying Slocum Lake the protections provided by the Bankruptcy Code. TheSlocum Lake case is extremely instructive for an Illinois Slocum Lake (and indeed, any Illinois Illinois Illinois in the last twenty years or more, the negotiations and outcome of the Village of Washington Park’s bankruptcy filing are sure to become a roadmap for any future Chapter 9 filings in Illinois
Perhaps the only state subdivision with a specific grant of authority for bankruptcy inIllinois Illinois
is to recommend that the municipality seek relief under Chapter 9. Only upon the commission’s recommendation can Illinois local governments seek relief under the Bankruptcy Code.(Slocum Lake Drainage District of Lake County, 336 B.R. 387 (N.D.Ill. 2006))
While a bankruptcy filing remains an option for an Illinois municipality experiencing an extreme financial crisis, the difficulty in obtaining the requisite authority and the necessary ceding of local control to a state agency makes bankruptcy an impractical option for all but the most severe financial emergencies. The difficulty of the process likely explains why no municipality has successfully undergone the Chapter 9 process inIllinois
Many people are familiar with the three most common types of bankruptcy filed under Chapters 7, 11, and 13, especially in light of recent high profile bankruptcy filings such as General Motors. However, municipalities cannot seek protection under the traditional bankruptcy chapters because those chapters are reserved exclusively for private individuals and corporations. Instead, a municipality must seek relief under the lesser-known Chapter 9. Although similar to reorganization under Chapter 11, Chapter 9 contains several significant and noteworthy differences. First, and perhaps most importantly, the municipal government must have a specific grant of authority by the state legislature to be a debtor in bankruptcy. This grant of authority cannot be general in nature, but must specifically mention and reference the bankruptcy code.(County of Orange, 183 B.R. 594 (C.D.Cal 1995)) Secondly, the municipality must:(1) have the agreement of its creditors; (2)
fail to obtain an agreement with its creditors after good faith negotiations; (3) show that negotiations would be impractical; or (4) reasonably believe that a creditor will attempt to obtain a preference as the term is defined by the Bankruptcy Code.
Until July 6, 2009, only one Illinois local government -- Slocum Lake Drainage District of Lake County -- had filed for bankruptcy in Illinois in the previous twenty years.(Slocum Lake Drainage District of Lake County, 336 B.R. 387 (N.D.Ill. 2006)) However, on the creditors’ motion, the bankruptcy court dismissed Slocum Lake’s bankruptcy petition thereby denying Slocum Lake the protections provided by the Bankruptcy Code. The
Perhaps the only state subdivision with a specific grant of authority for bankruptcy in
is to recommend that the municipality seek relief under Chapter 9. Only upon the commission’s recommendation can Illinois local governments seek relief under the Bankruptcy Code.(Slocum Lake Drainage District of Lake County, 336 B.R. 387 (N.D.Ill. 2006))
While a bankruptcy filing remains an option for an Illinois municipality experiencing an extreme financial crisis, the difficulty in obtaining the requisite authority and the necessary ceding of local control to a state agency makes bankruptcy an impractical option for all but the most severe financial emergencies. The difficulty of the process likely explains why no municipality has successfully undergone the Chapter 9 process in
