Chapter 9 of the Bankruptcy Code: A Solution in Search of a Problem

Abstract

As a result of the recent credit crisis, municipal insolvency has become a relevant and important issue. All over America cities are grappling with budget problems, and some of them are even considering bankruptcy. This Article analyzes the municipal bankruptcy process, and inquires whether it provides a sensible solution for urban fiscal crises. In order to examine this question, the Article delves into the prevailing rationales of bankruptcy law-the contractual theory and the fresh start theory. The Article makes the claim that these theories do not adequately explain the municipal bankruptcy process, and that filing for bankruptcy can damage the distressed locality as well as its state and other localities within the state. As an alternative to bankruptcy the Article suggests a proactive state oversight model. This model aims to address the economic problems that lie at the heart of the fiscal crisis, and it allows cities to undergo a genuine rehabilitation process.