What Happens When Your City Goes Bankrupt?

By now, you’ve probably gotten used to hearing stories about massive job cuts, foreclosures, lack of funding for certain programs, and so on. You might even think this all doesn’t affect you as long as you can hang onto your job.

But it might. And very soon.

The truth is that it’s no longer just individuals who are struggling financially. Entire cities and states are facing this financial crisis. Some cities have already gone bankrupt, and others are struggling not to do the same. Warren Buffett has called American municipal debt a “terrible problem.”

What happens if your city does file for bankruptcy? What does this mean for your everyday life?

How Cities File for Bankruptcy

Before we discuss what happens if your city goes bankrupt, let’s first talk a little bit about how a city files for bankruptcy. In 1934, Congress enacted the first municipal bankruptcy legislation—Chapter 9. This was during the Great Depression, so it was an act born out of necessity.

The purpose of this law is to protect financially-troubled municipalities (cities, towns, counties, school districts, etc.) against creditors while they come up with a plan for adjusting debts. Debts are typically refinanced, the interest is reduced, or interest is simply extended.

The law sets forth 4 eligibility requirements for filing for Chapter 9.

“1. the municipality must be specifically authorized to be a debtor by state law or by a governmental officer or organization empowered by State law to authorize the municipality to be a debtor;

2. the municipality must be insolvent, as defined in 11 U.S.C. § 101(32)(C);

3. the municipality must desire to effect a plan to adjust its debts; and

4. the municipality must either:

 

• obtain the agreement of creditors holding at least a majority in amount of the claims of each class that the debtor intends to impair under a plan in a case under chapter 9;

 

• negotiate in good faith with creditors and fail to obtain the agreement of creditors holding at least a majority in amount of the claims of each class that the debtor intends to impair under a plan;

 

• be unable to negotiate with creditors because such negotiation is impracticable; or

 

• reasonably believe that a creditor may attempt to obtain a preference.”

 

The Fallout

If your city files for bankruptcy, you might be worried that services will be stripped away. Will the police still be there? Will someone be on the other end of the line if you have to call 911? Will your trash still get picked up?

The good news is that life does seemingly go on like normal. The police and fire department are still around, and your garbage will still get picked up. However, budgets might be cut. Cops might not be allowed to work overtime unless granted special approval. Theoretically, crime rates could increase, and you could see more unsolved cases. And garbage pickup could be less frequent.

But the thing you’ll notice most is what doesn’t happen. When a city files for bankruptcy, no new developments are made usually. So you probably won’t be seeing a new school going up in your neighborhood, or you might not see any new roads or bridges being built any time soon. That’s because any new projects have to be approved by a majority of creditors.

It’s also important to note that when one city files for bankruptcy, it affects all other nearby towns and cities. That’s because investors will question if the other cities are financially viable, so they might not be willing to lend whenever requested.

Will Your City Go Bankrupt?

From Houston to Oakland to Newark, cities all across the country are facing huge financial problems. They’re cutting back jobs and taking drastic steps to keep things afloat. It seems like it’s only a matter of time before more cities and towns file for bankruptcy.

What do you think? Is your city safe?