Chapter 9 Municipal Bankruptcy Lawyer: Debt Adjustment, State Authorization and Plan Confirmation

The primary obstacle in any municipal filing is the interpretation of state statutes regarding bankruptcy authorization. Some states provide blanket authority for any subdivision to file while others require a specific executive order from the Governor or a vote by a state-appointed fiscal board. SJKP LLP conducts an exhaustive analysis of state legislative history and administrative rules to ensure the municipality has met every procedural requirement before the petition is submitted. We anticipate the inevitable challenges from creditors who will argue that the municipality lacks the standing to seek federal protection.

To qualify for relief, the municipality must prove that it is insolvent on either a cash-flow basis or a budget-projection basis. This means demonstrating that the entity is either currently unable to pay its debts as they become due or will be unable to do so in the near future. This is not a simple accounting exercise but a high-stakes evidentiary battle involving complex financial modeling and expert testimony. We utilize forensic economists to build a defensible record of insolvency that accounts for declining tax bases, rising legacy costs and the exhaustion of reserve funds.

Before filing for Chapter 9 municipal bankruptcy, a municipality must generally prove that it attempted to negotiate in good faith with its creditors and failed to reach an agreement. If the court determines that the municipality filed as a strategic move without truly seeking a consensual workout, it may dismiss the case for bad faith. We document every negotiation session, every proposal and every rejection to demonstrate that the municipality exhausted all reasonable alternatives. This record of good faith is the only shield against creditor claims that the bankruptcy filing is an abuse of the judicial process.

When a municipality defaults on its bonds, the traditional remedy for bondholders is to seek a writ of mandamus to force the city to raise taxes or to seize the revenues pledged as collateral. The automatic stay in city bankruptcy terminates these state court actions instantly. It ensures that the municipality’s cash flow remains available for operational needs rather than being diverted to debt service. SJKP LLP moves aggressively to enforce this stay against sophisticated financial institutions that may attempt to utilize special tax loopholes to bypass the court’s protection.

Creditors often attempt to pressure municipal leaders by filing lawsuits against them in their personal or official capacities. The automatic stay, combined with the court’s limited power under Section 904, prevents creditors from interfering with the political or governmental powers of the municipality. This means the bankruptcy judge cannot order the city to raise taxes or change its budget priorities. We utilize this jurisdictional boundary to protect the decision-making authority of local leaders, ensuring that the restructuring remains a political process guided by legal constraints.

One significant nuance of municipal debt restructuring is the treatment of special revenue bonds, which are backed by specific income streams such as utility fees or toll road revenues. Unlike general obligation bonds, these special revenues often continue to flow to bondholders during the case, subject to certain limitations. Navigating the distinction between general fund revenues and special revenues is a primary area of conflict. We provide clinical analysis to determine which funds can be protected for municipal operations and which must be shared with secured creditors.

The core of any municipal restructuring is the reduction of debt service on general obligation bonds. The Plan of Adjustment may extend maturity dates, lower interest rates or reduce the principal amount owed to bondholders. These impairments are non-consensual, meaning the court can force bondholders to accept the new terms if the plan is found to be fair and equitable. SJKP LLP specializes in the bondholder cramdown, utilizing complex valuation theories to prove that the municipality’s limited tax base cannot support the original debt structure.

Unfunded pension and OPEB (Other Post-Employment Benefits) liabilities often represent the largest and most volatile category of debt in a municipal restructuring. In certain cases, federal courts have ruled that pension obligations are contractual in nature and can be impaired in a Chapter 9 bankruptcy, despite state constitutional protections. This creates an existential threat to current and future retirees. We provide a surgical approach to public pension bankruptcy reform, balancing the municipality’s need for solvency with the political and legal risks of reducing retirement benefits.

The court will not confirm a Plan of Adjustment unless the municipality can prove that it is feasible, meaning it has a reasonable likelihood of remaining solvent after the bankruptcy concludes. This requires a credible ten to twenty-year financial forecast that accounts for economic cycles, infrastructure needs and population shifts. A plan that only provides a short-term fix is a failure of legal strategy. We work with specialized municipal advisors to build a litigation-ready financial model that proves the plan is a permanent solution to the municipality’s crisis.

The classification of creditors is a high-stakes tactical decision. By grouping supportive creditors together and separating hostile bondholders, a municipality can navigate the voting requirements to achieve confirmation. However, improper classification is a ground for plan rejection. SJKP LLP ensures that the classification scheme is defensible under the substantial similarity test, preventing creditors from arguing that the plan was engineered to strip them of their voting power.

To successfully cram down a Plan of Adjustment, the municipality must prove that the plan is fair and equitable. In the context of Chapter 9 municipal bankruptcy, this means the plan must be the best that the municipality can do given its tax base and its duty to provide for the safety and welfare of its citizens. This is a lower standard than the absolute priority rule found in corporate bankruptcy, providing municipalities with more leverage to protect public functions at the expense of creditor recovery. We build the evidentiary record needed to prove that any further recovery for creditors would result in the collapse of essential public services.

While the court has the power to confirm the Plan of Adjustment, it is prohibited from interfering with the daily management of the municipality. This jurisdictional tension is a defining characteristic of Chapter 9 bankruptcy. The court cannot fire city officials or dictate how many police officers are hired. Our firm manages this boundary to ensure that the restructuring process does not erode the local authority of the elected leadership. We ensure that the final plan of adjustment respects the municipality’s political autonomy while satisfying the legal requirements for a federal discharge.