Gatekeepers Gone Wrong: Reforming the Chapter 9 Eligibility Rules

Abstract

In order to file for chapter 9 bankruptcy, municipalities must demonstrate that they meet several eligibility requirements. Too often, these eligibility rules impede municipalities from attaining desperately needed relief. This Article posits that the chapter 9 eligibility requirements should be relaxed. To support this claim, the Article conducts a detailed analysis of the history and theory of chapter 9 to determine the primary reasons for the eligibility rules and the core functions of a municipal bankruptcy solution. It then demonstrates how many of the concerns driving the eligibility rules’ existence are addressed in other chapter 9 mechanisms and proposes sweeping revisions to the eligibility rules to facilitate, rather than impede, access to chapter 9. Specifically, municipalities in fiscal distress should be able to access bankruptcy when they demonstrate a need for the primary types of assistance that only bankruptcy can provide: nonconsensual debt adjustment, breathing space, and elimination of the holdout creditor problem. This Article thus brings needed attention to the questions of who should have access to the bankruptcy systems we have created and when that access should be granted.