Chapter 7 - Solutions for a Financial Crisis » Chapter 7 Bankruptcy

As their residents struggle to find work and earn money to put back into the communities, cities themselves face financial struggles.

To keep debts from rising cities may take other measures such as increase taxes or cut back on funding for specific programs. But there are other options for cities in severe cases including filing a special bankruptcy chapter.

Chapter 9 bankruptcy offers municipalities or cities with protection from their creditors. This allows them to reorganize and pay off their debts.

Quite different from Chapter 7 bankruptcy, Chapter 9 was created in 1934 during the Great Depression. Since then only 600 cities have filed for bankruptcy because this bankruptcy chapter requires state approval, which is not always easy to get.

Chapter 9 is seen as a last resort for municipalities because once they file it can leave the city unstable with many unpaid lenders.

According an article in the Wall Street Journal,most cities and states prefer to take other measures before they file for bankruptcy.

But this topic spurs debate amongst individual municipalities. Some think it’s the only option to bring the city back from serious debt. Others see Chapter 9 causing more problems than they had to begin with.

One of the most recent cities to file for municipal bankruptcy was Vallejo, California in 2008. They filed for many reasons including declines in real estate.

Government union workers were heavily impacted by the bankruptcy. Since then the city has struggled to rewrite worker’s contracts in the bankruptcy court, and now the city might have to start over with contracts.

The Wall Street Journal also reported that there are several cities teetering on the brink of Chapter 9 bankruptcy.

The city of San Diego faced some issues with benefits packages for public workers. The mayor is getting pressure to file but has refused to do so.

Las Vegas Monorail Inc., a nonprofit organization with $600 in municipal bonds, is seeking to file for Chapter 9 bankruptcy. They originally filed for chapter 11 due to declining revenue. The company barely made their operation costs as few people are using the monorail.

Although they are not a municipality their bond insurance group recently requested to change to Chapter 9 for the Nevada company. They claim the company is similar to a municipality and fits the standards for that type of protection.

Although cities are looking for other ways out of debt- Chapter 9 might be one of the few options they have.