The Logic and Limits of Municipal Bankruptcy Law
53 Pages Posted: 15 Aug 2018 Last revised: 9 Nov 2018
Date Written: July 31, 2018
Municipal bankruptcy’s recent prominence has stimulated academic interest in the workings of Chapter 9, much of it critical, but no general framework has been developed against which scholars and policymakers can evaluate the law’s performance. This article offers a normative, economic account of municipal bankruptcy and uses that account to assess current law and suggest changes. It contends that bankruptcy’s singular aim should be to preserve spatial economies—the advantages to locating within a municipality’s unique geographic boundaries—where large public debts, by discouraging investment, threaten to dissipate them. Judged with this end in view, it is argued, Chapter 9 is a marked failure. The law’s compass is so narrow that intervention comes, if at all, only when spatial economies are likely to have been squandered and economic dysfunction taken hold. Municipal bankruptcy, as it now exists, serves mainly as an ad hoc and ill-conceived subsidy program. This article outlines changes to the law that could hasten debt relief, while acknowledging potential objections.
Keywords: municipal bankruptcy, chapter 9, bankruptcy, economic analysis of bankruptcy, bankruptcy theory
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