Over the past several years, especially since the financial crisis, there has been considerable discussion about municipal bankruptcies and their effects. The most notable recent municipal bankruptcy was Detroit’s due to its large size and longstanding reliance on the auto industry. When conducting a bankruptcy that is applicable to a municipality, such a bankruptcy falls under Chapter 9 of the United States Bankruptcy Code.
The impact of a municipal bankruptcy can be far-reaching. Its scope is often the largest of any bankruptcy because it affects so many people and industries. In general, an employer-employee relationship is, in effect, a creditor-debtor relationship. That is to say, suppose a municipality pays its employees every two weeks. The employee works for the employer and, based on the work performed, receives a paycheck. Until the employee is paid, the employer owes the employee money, though it is not due until the pay date. Thus, upon a municipal bankruptcy, municipal employees are creditors and may have to go through the bankruptcy process to get paid for amounts owed prior to the municipality filing a bankruptcy petition.
For a municipality to be eligible for Chapter 9 bankruptcy, the following four conditions must be met:
Ripple Effect
When a municipality files for bankruptcy, this usually signals significant trouble. These troubles may cause many other people, especially municipal employees, to also file for bankruptcy. While a struggling city already has its share of corporate bankruptcies and corporate relocations long before the bankruptcy, it is usually the employees who will suffer the most.
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