When Your Town Goes Bust
Lately municipal bankruptcy has been the subject of many news features as economic troubles press cities to consider their legal options. San Diego and Los Angeles are two major cities that are reportedly considering federal bankruptcy protection.
While federal bankruptcy protection has been available to U.S. cities since the 1930’s, only a few hundred have actually filed. Chapter 9 of the Bankruptcy Code provides a financially distressed municipality the opportunity to reorganize its debts under federal protection. A “municipality” as defined in the Bankruptcy Code includes cities, counties, and special districts. This definition does not include states.
A Chapter 9 bankruptcy can only be commenced after the governing body specifically authorizes the filing. Twenty-six U.S. states have prohibited their municipalities from filing bankruptcy: Alaska, Delaware, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Maine, Maryland, Massachusetts, Mississippi, Nevada, New Hampshire, New Mexico, North Dakota, Oregon, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Virginia, West Virginia, Wisconsin, and Wyoming.
Once filed the federal bankruptcy law’s automatic stay provision enjoins creditors from taking any collection action against the municipality. The automatic stay provides an opportunity for the municipality to raise new revenues, renegotiate contracts, or restructure its debt without pressure from creditors. Chapter 9 is tricky business for the bankruptcy court because the Tenth Amendment to the U.S. Constitution and section 904 of the Bankruptcy Code prevents a federal bankruptcy court from interfering with the city’s political or governmental powers. The bankruptcy judge is largely a facilitator of the restructuring process.
The essence of a Chapter 9 bankruptcy is that it gives the municipality an opportunity to reorganize and restructure its debts through an agreement with its creditors called a “Plan of Adjustment.” If a creditor cannot agree with the municipality, Chapter 9 allows the bankruptcy court to force the municipality’s Plan of Adjustment on the non-consenting creditor. The bankrupt municipality is also empowered to accept or reject contracts and leases through the Plan of Adjustment.
Chapter 9 municipal bankruptcy is a very rare and special bankruptcy case. The stigma and complexity of Chapter 9 makes it a last option for U.S. municipalities. However, if the debt problem is serious and substantial enough, the federal bankruptcy laws can protect a city of millions and give it a chance for a fresh start, just like it can protect an individual or family in financial distress.
The Perils of a “Do It Yourself” Bankruptcy
Federal law guarantees open access to the courts and permits self representation in lawsuits, including bankruptcy proceedings. However, the most important question is not “can you,” but “should you” represent yourself in a bankruptcy case.
Proceeding pro se (Latin meaning “for himself”) in a bankruptcy case is like navigating a mine field while blindfolded. Is it possible to be successful? Sure! Will your bankruptcy case blow up? Probably. Books and internet resources simply cannot substitute for competent legal advice. Below are a few reasons why a pro se bankruptcy is a bad idea:
Reason 1: The Federal Bankruptcy Code is complex.
Reason 2: The Federal Rules of Bankruptcy Procedure are complex (and changing as of December 1, 2009).
Reason 3: The bankruptcy court’s local rules are complex.
Reason 4: The applicability of state law to federal bankruptcy law is complex, including state exemption laws, state criminal laws, and state collection laws.
Reason 5: The bankruptcy trustee will examine your case more closely since you are not represented by counsel. The trustee will likely put you at the end of the 341 meeting docket to have extra time to review your bankruptcy case and ask questions.
Reason 6: Most skilled bankruptcy attorneys will not step into the middle of a pro se case when things go wrong.
Reason 7: Are you really qualified to answer important questions, like: “When should you file?” “What chapter should you file?”
Reason 8: Most courts will not allow a pro se bankruptcy debtor to file documents electronically through the court’s internet ECF system.
Reason 9: You can be audited by a CPA firm selected by the Department of Justice.
Reason 10: Occasionally the pro se case is such a chaotic mess that the debtor is forced to dismiss the bankruptcy and later re-file with the assistance of an attorney. That’s two bankruptcies on your credit report for the price of one!
Reason 11: If you are reaffirming a debt, you must appear in open court and answer the bankruptcy judge’s questions.
The upside of representing yourself is saving a few dollars. The downside is a considerable risk to your property, your future finances, and, in extreme cases, your liberty. Don’t risk your families’ well-being! Let an experienced bankruptcy attorney guide you through your bankruptcy case.