The housing crisis, combined with the recession, turned the five-year period from 2006 to 2010 into a fiscal nightmare for most of the country. Few states are in a more precarious financial situation than Illinois, according to most published reports. Bankruptcy would seem to be a potential answer to the state’s perilous fiscal condition. However, every bankruptcy lawyer knows that federal bankruptcy laws do not allow states to file for bankruptcy protection.
Chapter 9 bankruptcy
There is a chapter within federal bankruptcy laws that offers protection to cities. Chapter 9 is available to municipalities as a way for bankruptcy lawyers representing the city to negotiate with creditors to lower the interest rate of debt, reduce the debt itself or lengthen the term of outstanding loans and debts. Chapter 9 is available to cities, entire counties and even school districts.
Cities relying on Chapter 9
According to published reports, dozens of cities throughout the country have sought out bankruptcy lawyers and filed for bankruptcy since 2009. So far, the largest bankruptcy filing involves Jefferson County in Alabama, where a troubled sewer venture in the county left officials with more than $4 billion in debt. However, 2012 could see several high-profile Chapter 9 filings, according to experts. Like most cities in California, Stockton is suffering financially. The city, about 80 miles east of San Francisco, was hit hard by the housing crisis. A huge 25 percent drop in home values helped create a hole in the city’s budget because of the corresponding loss of property taxes. If the city of 292,000 files for bankruptcy, it will become the largest in the country to turn to Chapter 9 protection.
Problems in Illinois
Unfortunately for Illinois residents, the state is at or near the top of most lists that have to do with serious money troubles. For example, Illinois and California received the lowest credit rating in 2011 from Moody’s Investors Service. The problem for Illinois is an enormous deficit, pegged at about $13 billion earlier in 2012. That figure includes $6 billion in unpaid bills to thousands of creditors. Illinois is far from alone, according to the Center on Budget and Policy Priorities. For the 2013 fiscal year that starts on July 1, statistics show that 30 states have budget shortfalls that total $49 billion. The main issues in Illinois are reimbursements owed to Medicaid providers that have been growing each of the past four years and underfunded pension plans. Both are problems throughout the country. In the pension arena, many states were hit hard during the recession because pension money put into the stock market lost billions of dollars. In Illinois, officials have estimated that the state had about $64 billion on hand as of June 2011 and $126.4 billion owed to about 723,000 workers in state pension plans.
Could bankruptcy laws be changed?
Most experts, including bankruptcy lawyers, agree that it is possible to write a new section to the bankruptcy law to provide protection for states. But there are significant impacts from bankruptcy that make it unpalatable to most state residents and politicians. The state would undoubtedly have to change its pension obligations to retirees as a part of any bankruptcy filing. That would make the idea extremely unpopular. In addition, bankruptcy would seriously endanger a state’s future ability to borrow money. All states issue bonds that are backed by the state and provide a safe interest rate to investors around the country. However, filing bankruptcy would seriously compromise the ability of a state to find any willing investors.
Important Disclaimer: The information discussed above and throughout this website should not be relied upon to make any decisions without first speaking to a bankruptcy attorney. There are many intricate rules of law governing bankruptcy with many exceptions to the general rules that could change the advice given by an attorney based on the differing facts in each person’s special set of circumstances. THEREFORE, it is important to discuss any information contained in this website with one of our attorneys before taking any action or refraining from taking any action.