Chapter 9 bankruptcy is a form of debt reorganization reserved for municipal governments and other local authorities that are unable to meet their obligations and require relief from debts. According to David Haynes for About.com, only subdivisions of a state government are permitted to file for a Chapter 9 reorganization, which prevents its use by individuals, corporations or other entities but permits filing by municipal utilities and other municipal entities.
Haynes notes that Chapter 9 bankruptcy is not used often, as most government agencies have the power to either levy taxes or issue bonds to cover excess debt. When these options are unavailable, however, or when the amount of debt carried by the municipality balloons to unmanageable levels, reorganization may be the only viable option.
According to Haynes, municipal agencies that seek protection under Chapter 9 must meet stringent criteria. The agency must be specifically authorized by state law to file under Chapter 9. The agency must also declare that it is insolvent. Additionally, the entity must express a willingness, in principle, to adjust its debts. Finally, the filing agency is expected to obtain consent for reorganization from a majority of its creditors. If consent cannot be obtained, relief may be granted by showing a good-faith effort to obtain the necessary consent.