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Should Illinois Cities be Permitted to File for Bankruptcy?

Posted on in Bankruptcy

Should Illinois Cities be Permitted to File for Bankruptcy?

Many Illinois cities are facing financial difficulties that can potentially be resolved through bankruptcy. According to the policy nonprofit Manhattan Institute, this is exactly what needs to happen. When a municipality is unable to pay back its debt, it may file for Chapter 9 bankruptcy, which allows certain contracts to be broken so the intervening trustee can reallocate money to help the municipality repay its debt. Illinois is not a stranger to this type of bankruptcy; since 1988, three cities in the state have filed for Chapter 9 bankruptcy. This number could have been higher if the Illinois Financially Distressed City Law, an act that created a system that allows financially struggling cities to seek loans, bonds, and financial oversight from a state board in order to avoid bankruptcy, had not been passed in 1990.

How Can a City File for Bankruptcy?

It is not easy for a city to file for Chapter 9 bankruptcy. Often, municipalities face pushback from their states for wanting to file for Chapter 9 because it reflects badly on the city and the state to creditors who might see the bankruptcy as a reason not to invest in other cities in the state.

A municipality may file a petition for Chapter 9 bankruptcy with the court and provide a list of its creditors. If the municipality is deemed to be eligible for Chapter 9 bankruptcy and the claim is accepted, it is passed to a bankruptcy judge who oversees the process of the city's bankruptcy.

What Happens When a City Files for Bankruptcy?

Chapter 9 bankruptcy is similar to Chapter 13 in that it provides the indebted municipality with protection while it works out a repayment plan to cover its debt. A municipality's assets are not liquidated as part of this process. What often happens is that the municipality scales back public services and public employees may have their benefits or pensions reduced. Often, municipalities work through bankruptcy by laying off employees and imposing hiring freezes.

Cities may develop new operating budgets while under bankruptcy supervision. Often, filing for Chapter 9 bankruptcy has a lasting effect on a city and the surrounding municipalities. The city's credit rating is downgraded, which can turn private businesses away from operating in it and even in neighboring towns. This, in turn, often drives residents away in search of new employment opportunities and stronger local economies. Although bankruptcy can help a city resolve its financial distress, states are often reluctant to allow municipal bankruptcies to happen because of these long-term consequences.

Work with an Experienced Mundelein Bankruptcy Lawyer

If you are considering filing for bankruptcy or if you simply want to learn more about the process, speak with an experienced bankruptcy lawyer. Contact our team at Newland & Newland, LLP today to schedule your initial consultation in our office. During your consultation, we can answer any questions you have and help you determine the right bankruptcy strategy for your case. We serve clients in the Arlington Heights, Palatine, Rolling Meadows, Libertyville, Mundelein, Buffalo Grove, Schaumburg, Elk Grove, and Itasca areas.

(image courtesy of Vincenzo di Giorgi)

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