Cities and other municipalities falling on hard financial times is nothing new, but it is rare that any such entity files for bankruptcy as a way of addressing its massive debts. Out of nearly 89,500 municipalities in the country, there were just 239 municipal bankruptcy filings between 1980 and 2010.1 Now, a slew of high profile municipal bankruptcy cases from San Bernardino, California, to Central Falls, Rhode Island, to Jefferson County,Alabama, are increasing the visibility of municipal bankruptcies, but not necessarily making the process better understood. This guide serves as an overview of the basics of municipal bankruptcy, and boils down the municipal bankruptcy process so that officials and citizens have a framework within which to discuss whether bankruptcy is a viable option. It outlines who is involved in the process, which states permit municipal bankruptcy, when a municipality may be considered insolvent, the potential costs and benefits of the process, and more.
It is important to note that bankruptcy, specifically municipal bankruptcy, is an incredibly complicated process. Eligibility, procedures, and results differ based on the location of the municipality, where the proceedings occur, and for what purpose. This report provides an overview of the process, but is not legal advice. Additional questions about municipal bankruptcy will inevitably arise, and consultation with an attorney or expert in the field is strongly advised.