# When cities go bankrupt ...... **URL:** \ **Category:** Factual Questions\ **Created:** [January 4, 2013, 2:07pm UTC](https://boards.straightdope.com/t/when-cities-go-bankrupt/646055 "2013-01-04T14:07:31Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![What\_the](https://avatars.discourse-cdn.com/v4/letter/w/f4b2a3/32.png) [@What\_the](https://boards.straightdope.com/u/What_the)\ **Post date:** [January 4, 2013, 2:07pm UTC](https://boards.straightdope.com/t/when-cities-go-bankrupt/646055/1 "2013-01-04T14:07:31Z")
… how are the various states obligated to help them? I assume it totally varies by state but is there some kind of standard forced upon them? Is there anything at all preventing the federal govt from “assisting”? I can imagine that some states would prefer not to have the kind of assistance that the feds would be inclined to give. ---
**Author:** ![friedo](https://avatars.discourse-cdn.com/v4/letter/f/8edcca/32.png) [@friedo](https://boards.straightdope.com/u/friedo)\ **Post date:** [January 4, 2013, 2:21pm UTC](https://boards.straightdope.com/t/when-cities-go-bankrupt/646055/2 "2013-01-04T14:21:40Z")
Municipal bankruptcy is handled under [Chapter 9](http://en.wikipedia.org/wiki/Chapter_9,_Title_11,_United_States_Code) of the US bankruptcy code. It works largely the same as any bankruptcy organization, with the Court supervising a process whereby the municipality negotiates with its creditors. The state is not obligated to help in any way. But it may find it advantageous to do so, since if the city is so destitute that it faces no choice but disincorporation, the state will assume the city’s debts. There is nothing that prevents the federal government from assisting a bankrupt city monetarily. I’m not aware of them doing that on a regular basis, though. The bankruptcy courts are of course part of the federal judicial branch. ---
**Author:** ![Quercus](https://avatars.discourse-cdn.com/v4/letter/q/7ab992/32.png) [@Quercus](https://boards.straightdope.com/u/Quercus)\ **Post date:** [January 4, 2013, 6:53pm UTC](https://boards.straightdope.com/t/when-cities-go-bankrupt/646055/3 "2013-01-04T18:53:47Z")
Also, often when a municipality ‘goes broke’, it’s not actually a process of formally going to bankruptcy court, but rather something like the state taking over the municipal government to a degree, with a state-appointed Receiver who has the authority to cut spending and raise taxes sufficiently to get the books at least sort-of balanced (remember, municipalities only exist because state law lays out how municipalities work, so the state can do things like this to municipalities). ---
**Author:** ![Northern\_Piper](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/northern_piper/32/5304_2.png) [@Northern\_Piper](https://boards.straightdope.com/u/Northern_Piper)\ **Post date:** [January 5, 2013, 3:58am UTC](https://boards.straightdope.com/t/when-cities-go-bankrupt/646055/4 "2013-01-05T03:58:29Z")
> [@Quercus](#): > > Also, often when a municipality ‘goes broke’, it’s not actually a process of formally going to bankruptcy court, but rather something like the state taking over the municipal government… That appears to be contradicted by \*\*friedo’s \*\* link to Chapter 9 of the federal Bankruptcy Code: > [@](#): > > Chapter 9, Title 11 of the United States Code is a chapter of the United States Bankruptcy Code, available exclusively to municipalities and assists them in the restructuring of debts. ---
**Author:** ![gms453](https://avatars.discourse-cdn.com/v4/letter/g/50afbb/32.png) [@gms453](https://boards.straightdope.com/u/gms453)\ **Post date:** [January 5, 2013, 1:08pm UTC](https://boards.straightdope.com/t/when-cities-go-bankrupt/646055/5 "2013-01-05T13:08:13Z")
In PA, municipalities decide whether to declare Bankruptcy; the State decides whether to “take over” financially distressed municipalities. ---
**Author:** ![What\_the](https://avatars.discourse-cdn.com/v4/letter/w/f4b2a3/32.png) [@What\_the](https://boards.straightdope.com/u/What_the)\ **Post date:** [January 5, 2013, 2:14pm UTC](https://boards.straightdope.com/t/when-cities-go-bankrupt/646055/6 "2013-01-05T14:14:21Z")
> [@friedo](#): > > … the state will assume the city’s debts. Is that in fact the case? A state is required to assume the debts (all debts) of any municipality that can’t pay ?? ---
**Author:** ![friedo](https://avatars.discourse-cdn.com/v4/letter/f/8edcca/32.png) [@friedo](https://boards.straightdope.com/u/friedo)\ **Post date:** [January 5, 2013, 3:24pm UTC](https://boards.straightdope.com/t/when-cities-go-bankrupt/646055/7 "2013-01-05T15:24:39Z")
> [@What\_the](#): > > Is that in fact the case? A state is required to assume the debts (all debts) of any municipality that can’t pay ?? Municipal governments have no sovereignty; they are wholly created creatures of the state government, and the state is ultimately responsible for all their assets and liabilities. > [@Northern Piper](#): > > That appears to be contradicted by friedo’s link to Chapter 9 of the federal Bankruptcy Code: I think **Quercus** was referring to cases where the state wants to avoid bankruptcy court and so steps in to take things over and get the budget back on track. An example would be the decade-long kerfuffle in [Nassau County, New York](http://www.nytimes.com/2011/01/27/nyregion/27nassau.html?pagewanted=all). ---
**Author:** ![jz78817](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/jz78817/32/1028_2.png) [@jz78817](https://boards.straightdope.com/u/jz78817)\ **Post date:** [January 5, 2013, 3:34pm UTC](https://boards.straightdope.com/t/when-cities-go-bankrupt/646055/8 "2013-01-05T15:34:10Z")
> [@friedo](#): > > Municipal governments have no sovereignty; they are wholly created creatures of the state government, and the state is ultimately responsible for all their assets and liabilities. > > I think **Quercus** was referring to cases where the state wants to avoid bankruptcy court and so steps in to take things over and get the budget back on track. An example would be the decade-long kerfuffle in [Nassau County, New York](http://www.nytimes.com/2011/01/27/nyregion/27nassau.html?pagewanted=all). or the mess in Detroit. ---
**Author:** ![Mr\_Downtown](https://avatars.discourse-cdn.com/v4/letter/m/8e8cbc/32.png) [@Mr\_Downtown](https://boards.straightdope.com/u/Mr_Downtown)\ **Post date:** [January 6, 2013, 5:48am UTC](https://boards.straightdope.com/t/when-cities-go-bankrupt/646055/9 "2013-01-06T05:48:06Z")
> [@friedo](#): > > Municipal governments have no sovereignty; they are wholly created creatures of the state government, and the state is ultimately responsible for all their assets and liabilities. Cite? A municipal corporation is not a subdivision of the state nor an agency empowered to act on the state’s behalf. ---
**Author:** ![friedo](https://avatars.discourse-cdn.com/v4/letter/f/8edcca/32.png) [@friedo](https://boards.straightdope.com/u/friedo)\ **Post date:** [January 6, 2013, 11:06am UTC](https://boards.straightdope.com/t/when-cities-go-bankrupt/646055/10 "2013-01-06T11:06:58Z")
> [@Mr\_Downtown](#): > > Cite? A municipal corporation is not a subdivision of the state nor an agency empowered to act on the state’s behalf. That is _exactly_ what a municipal corporation is. At least in the United States. The “Dillon Rule” is the general theory of state preeminence over municipalities and many court cases reference it. > [@Clinton v Cedar Rapids and the Missouri River Railroad](#): > > Municipal corporations owe their origin to, and derive their powers and rights wholly from, the legislature. It breathes into them the breath of life, without which they cannot exist. As it creates, so may it destroy. If it may destroy, it may abridge and control. Many states grant some amount of home-rule powers to municipal corporations via a general municipal law or individual charters, but these can be taken away just as easily, by a new act of the legislature. A municipality has no power to act independently without explicit permission from the state that created it. ---
**Author:** ![What\_the](https://avatars.discourse-cdn.com/v4/letter/w/f4b2a3/32.png) [@What\_the](https://boards.straightdope.com/u/What_the)\ **Post date:** [January 6, 2013, 2:28pm UTC](https://boards.straightdope.com/t/when-cities-go-bankrupt/646055/11 "2013-01-06T14:28:32Z")
Thanks for the info!! Are there any examples of states getting out front of problems that “their” municipalities are creating? ---
**Author:** ![Mr\_Downtown](https://avatars.discourse-cdn.com/v4/letter/m/8e8cbc/32.png) [@Mr\_Downtown](https://boards.straightdope.com/u/Mr_Downtown)\ **Post date:** [January 6, 2013, 6:03pm UTC](https://boards.straightdope.com/t/when-cities-go-bankrupt/646055/12 "2013-01-06T18:03:44Z")
> [@friedo](#): > > A municipality has no power to act independently without explicit permission from the state that created it. Correct. But that’s a very different thing from saying the municipality can act \*on behalf of \*the state; that the municipal corporation can create debts which the state is obligated to repay. ---
**Author:** ![Tom\_Tildrum](https://avatars.discourse-cdn.com/v4/letter/t/e95f7d/32.png) [@Tom\_Tildrum](https://boards.straightdope.com/u/Tom_Tildrum)\ **Post date:** [January 6, 2013, 6:18pm UTC](https://boards.straightdope.com/t/when-cities-go-bankrupt/646055/13 "2013-01-06T18:18:37Z")
Private corporations are created by state law as well, but the state is not obliged to assume their debts in bankruptcy. ---
**Author:** ![friedo](https://avatars.discourse-cdn.com/v4/letter/f/8edcca/32.png) [@friedo](https://boards.straightdope.com/u/friedo)\ **Post date:** [January 6, 2013, 6:25pm UTC](https://boards.straightdope.com/t/when-cities-go-bankrupt/646055/14 "2013-01-06T18:25:19Z")
> [@Mr\_Downtown](#): > > Correct. But that’s a very different thing from saying the municipality can act \*on behalf of \*the state; that the municipal corporation can create debts which the state is obligated to repay. I don’t understand what you mean. If a municipal corporation with debt disincorporates, then the state is responsible for that debt. It doesn’t go away. The state may assume the debt directly or it may go to a higher-level municipality like a county government, depending on state law or custom. If a municipality does not wish to disincorporate, then its choices are Chapter 9 bankruptcy (if the state allows) or some kind of takeover/bailout by the state government. As an example, in New York, the General Municipal Law makes the debts of a disincorporated local government the responsibility of the town that it’s in. > [@N.Y. GMU. LAW § 790](#): > > The outstanding debts, > liabilities and obligations of the dissolved local government entity > shall be assumed by the town in which the dissolved entity was situated > and shall be a charge upon the taxable property within the limits of the > dissolved entity, collected in the same manner as town taxes. The town > board shall have all powers with respect to the debts, liabilities and > obligations as the governing body of the dissolved entity possessed > prior to its dissolution, including the power to issue town bonds to > redeem bond anticipation notes issued by the dissolved entity. ---
**Author:** ![friedo](https://avatars.discourse-cdn.com/v4/letter/f/8edcca/32.png) [@friedo](https://boards.straightdope.com/u/friedo)\ **Post date:** [January 6, 2013, 6:29pm UTC](https://boards.straightdope.com/t/when-cities-go-bankrupt/646055/15 "2013-01-06T18:29:52Z")
> [@Tom\_Tildrum](#): > > Private corporations are created by state law as well, but the state is not obliged to assume their debts in bankruptcy. Nobody said that states are required to assume debts in a corporate bankruptcy. Chapter 9 bankrupcties are debt reorganizations. But the state is _ultimately_ responsible a municipality’s liabilities if that municipality ceases to exist. ---
**Author:** ![Tom\_Tildrum](https://avatars.discourse-cdn.com/v4/letter/t/e95f7d/32.png) [@Tom\_Tildrum](https://boards.straightdope.com/u/Tom_Tildrum)\ **Post date:** [January 6, 2013, 7:54pm UTC](https://boards.straightdope.com/t/when-cities-go-bankrupt/646055/16 "2013-01-06T19:54:56Z")
> [@friedo](#): > > Nobody said that states are required to assume debts in a corporate bankruptcy. Chapter 9 bankrupcties are debt reorganizations. But the state is _ultimately_ responsible a municipality’s liabilities if that municipality ceases to exist. My point was just that the fact that municipalities are creations of state law doesn’t tell us what happens to their debts. State law may indeed typically provide that states shall assume a disincorporated city’s debts, but nothing about the power to create or destroy a city _requires_ the state to do so. The state could provide to the contrary, although this would presumably raise its cities’ borrowing costs. ---
**Author:** ![Mr\_Downtown](https://avatars.discourse-cdn.com/v4/letter/m/8e8cbc/32.png) [@Mr\_Downtown](https://boards.straightdope.com/u/Mr_Downtown)\ **Post date:** [January 7, 2013, 5:09am UTC](https://boards.straightdope.com/t/when-cities-go-bankrupt/646055/17 "2013-01-07T05:09:02Z")
> [@friedo](#): > > If a municipal corporation with debt disincorporates, then the state is responsible for that debt. Says who? Just because the municipal corporation is created by the state doesn’t make it a _general agent_ of the state, with the power to act in all ways as if it were the state. If states were responsible for the debts created by their cities, there would be no need to compile credit ratings for thousands of counties, municipalities, and special districts. ---
**Author:** ![Diceman](https://avatars.discourse-cdn.com/v4/letter/d/22d042/32.png) [@Diceman](https://boards.straightdope.com/u/Diceman)\ **Post date:** [January 7, 2013, 1:09pm UTC](https://boards.straightdope.com/t/when-cities-go-bankrupt/646055/18 "2013-01-07T13:09:18Z")
> [@What\_the](#): > > Thanks for the info!! Are there any examples of states getting out front of problems that “their” municipalities are creating? Well, Michigan is trying to with its Emergency Financial Manager laws. Of course, the incompetant fuckups who drove their cities into the dirt are fighting them every step of the way, along with unions and other who benefit from the status quo. ---
**Author:** ![What\_the](https://avatars.discourse-cdn.com/v4/letter/w/f4b2a3/32.png) [@What\_the](https://boards.straightdope.com/u/What_the)\ **Post date:** [January 7, 2013, 1:26pm UTC](https://boards.straightdope.com/t/when-cities-go-bankrupt/646055/19 "2013-01-07T13:26:12Z")
> [@friedo](#): > > I don’t understand what you mean. If a municipal corporation with debt disincorporates, then the state is responsible for that debt. It doesn’t go away. The state may assume the debt directly or it may go to a higher-level municipality like a county government, depending on state law or custom. > > If a municipality does not wish to disincorporate, then its choices are Chapter 9 bankruptcy (if the state allows) or some kind of takeover/bailout by the state government. > > As an example, in New York, the General Municipal Law makes the debts of a disincorporated local government the responsibility of the town that it’s in. Debt goes away all the time. Your cite doesn’t give an example of a state being required to assume the debt of a municipality. Can anybody give examples of states that are in fact required to assume a municipality’s debt? ---
**Author:** ![What\_the](https://avatars.discourse-cdn.com/v4/letter/w/f4b2a3/32.png) [@What\_the](https://boards.straightdope.com/u/What_the)\ **Post date:** [January 9, 2013, 3:08pm UTC](https://boards.straightdope.com/t/when-cities-go-bankrupt/646055/20 "2013-01-09T15:08:13Z")
Anybody else??? Are some states required to honor the contracts and assume the debt of municipalities? How about the federal gov’t and the states? [Next page](https://boards.straightdope.com/t/when-cities-go-bankrupt/646055.md?page=2)