Largest Chapter 9 Bankruptcy Cases in History

Section 109(c) permits a “municipality” to file bankruptcy under Chapter 9 of the federal Bankruptcy Code. The term “municipality” is defined in section 101: “The term ‘municipality’ means political subdivision or public agency or instrumentality of a State.” In other words, a Chapter 9 municipal bankruptcy has been used by cities, counties, hospital and health care districts, school districts, public utilities, public parks, housing authorities, and other publically owned agencies. Chapter 9 is not available for states.

From 1937 to 2008 there were fewer than 600 municipal bankruptcy cases (but only about 60 city or county Chapter 9 filings since 1950). In 2012 alone there were twelve chapter 9 bankruptcies in the United States. Chapter 9 is become a more popular means to reorganize public debt under the supervision of the federal court. Four of the five largest Chapter 9 bankruptcy cases were filed after 2010. Let’s look at the largest Chapter 9 bankruptcy cases ever filed:

Number 5: Stockton, California
The City of Stockton (population 292 thousand) filed Chapter 9 bankruptcy in June 2012 with approximately $700 million of bond debt it could not afford to pay. The City used federal bankruptcy protection to negotiate new contracts with labor unions and settled lawsuits. In all, the City cut a reported $2.5 billion from its budget over 30 years. Stockton officials approved a plan and voters approved a sales tax that will help the City exit bankruptcy.

Number 4: San Bernardino, California
The City of San Bernardino (population 209 thousand) also filed Chapter 9 bankruptcy in 2012, just two months after Stockton. San Bernardino’s financial problems arose from a $46 million budget deficit and over $200 million in unfunded liabilities to retirees for health care and pension obligations. All told, the City was over $1 billion in debt. San Bernardino officials and City creditors are currently in negotiations to develop a plan to repay debts and restructure the City’s finances.

Number 3: Orange County, California
Orange County declared bankruptcy in December 1994 due to a complex investment strategy that failed. The county ended up with roughly $1.7 billion in financial losses and had to lay off 500 workers as part of budget cuts. Former Orange County Treasurer Robert Citron was eventually convicted of defrauding investment fund members and misappropriating assets.

Number 2: Jefferson County, Alabama
Jefferson County filed for bankruptcy in November 2011 when it failed to obtain approval for an estimated $3.2 billion worth of sewer bonds. Jefferson County’s overall debt was estimated at $4.2 billion. In December 2013, officials closed the sale of nearly $1.8 billion in new debt and ended the nation's second-largest municipal bankruptcy.

Number 1: Detroit, Michigan
Detroit’s 2013 bankruptcy includes an estimated $18 billion in liabilities, making it far and away the largest Chapter 9 municipal bankruptcy in history. At 682 thousand residents, Detroit is also the largest city to file bankruptcy, more than twice the population of Stockton, California. Detroit’s financial woes are numerous and include a shrinking tax base caused by declining population, program costs for retiree health care and pension, borrowing to cover budget deficits, poor record keeping and antiquated computer systems, unpaid property taxes, and government corruption. In December a federal bankruptcy judge ruled that Detroit was eligible to file bankruptcy over the objection of creditors. That ruling is being appealed.

If you need relief of major debts, are considering to file bankruptcy, or have any questions about bankruptcy please contact the experienced bankruptcy attorneys at Fears | Nachawati Law Firm for a free consultation. Call us at 1.866.705.7584 or send an email to fears@fnlawfirm.com.

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