Municipal bankruptcies may force municipal bondholders to accept haircuts
Most people are familiar with the two most common forms of bankruptcy protection under the Bankruptcy Code – Chapter 7 liquidations and Chapter 11 reorganizations. But like individuals and companies, municipalities can also file for bankruptcy protection under Chapter 9 of the Bankruptcy Code. Now the city of Stockton, California has become the largest city to file for municipal bankruptcy protection following major municipal bankruptcy filings in Jackson County, Alabama and Harrisburg, Pennsylvania. These municipal bankruptcies remain rare, but their numbers are increasing as municipal revenues decline and obligations such as pensions increase. Not only do municipal bankruptcies give us a window into the state of the public sector, but they may impact municipal bondholders as well.