Virginia Municipal Liability: When a City Goes Bankrupt

Several filings of municipal bankruptcies over the past year, notably the July 2013 bankruptcy in Detroit, have transformed Chapter 9 of the U.S. bankruptcy code for municipal reorganization from a relatively obscure body of law into a hot topic. Many residents of struggling cities, and city officials themselves, are wondering what the possibility of bankruptcy means for them.

Congress enacted federal bankruptcy legislation for municipalities in the 1930s. Between 1991 and 2012, there have been 217 municipal bankruptcies, according to data from the U.S. court system. Of these, 20 were filed just recently, in 2013. So it’s only natural that municipalities nationwide are becoming concerned. While purchasing Virginia Municipal Liability insurance will help, it’s important for public officials to understand what happens when a city goes bankrupt. Doing so will help you to better address your city residents’ concerns.

The key to understanding municipal bankrupts is to know what Chapter 9 is. A Chapter 9 filing is similar to Chapters 11 and 13 of the bankruptcy code, which deal with business and personal reorganizations, respectively. Under all three of these scenarios, debtors get a reprieve for paying creditors while they propose and implement a restructuring plan. Unlike private citizens and companies though, municipalities are sovereign entities.

Once a municipality is bankrupt, it can cut costs, which usually means fewer services such as firefighting, garbage collection, and library branches. Or it can increase revenue by raising taxes. Overall, according to bankruptcy lawyer Franklin C. Adams, municipal bankruptcies usually mean a reduction in the size, scope and quality of services because that is where the biggest costs are.

At Professional Governmental Underwriters, Inc., we know that all public entities and municipalities are not created equal. Different needs and circumstances require different answers. Therefore, when we provide you with a Virginia Municipal Liability Insurance coverage strategy, it is for your specific situation. Please Contact Us today to learn more about our products and services.