The City of Detroit has declared bankruptcy under Chapter 9 of the Bankruptcy Code. Chapter 9 provides for reorganization of municipalities, which includes cities and towns, as well as villages, counties, taxing districts, municipal utilities, and school districts.
Chapter 9 filings are not common. From 1991-2012 there were 217 Chapter 9 bankruptcies filed nationwide, with 20 filed in FY 2012. The majority of the cases have been for utility districts and not sovereign government entities. This map shows total Chapter 9 bankruptcies by district from 1991 to 2012.
The purpose of Chapter 9 is to provide a financially distressed municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts. Reorganization of the debts of a municipality is typically accomplished either by extending debt maturities, reducing the amount of principal or interest, or refinancing the debt by obtaining a new loan.
Although similar to other chapters in some respects, Chapter 9 is significantly different in that there is no provision in the law for liquidation of the assets of the municipality and distribution of the proceeds to creditors.