Municipal Bankruptcy: The Need for an Expanded Chapter IX

New York City’s default crisis in 1975 presented to Congress and the nation the possibility of a major municipality’s entering the federal bankruptcy court. Chapter IX of the Bankruptcy Act, as recently amended by Congress, provides the exclusive remedy by which local governmental units may obtain relief from burdensome indebtedness. Unlike certain other chapters of the Bankruptcy Act, Chapter IX is limited to a voluntary composition or extension of indebtedness. In recent years municipalities have developed complex systems of financing, while experiencing unprecedented expansion in the services which they must provide. Accordingly, a mere composition of municipal indebtedness is no longer adequate, because a composition can only reduce the debt or postpone the default. In order to solve the problems which precipitate a particular financial crisis, a complete reorganization of municipal finances may be necessary. However, under Chapter IX bankruptcy courts are not empowered to effectuate such a comprehensive reorganization as a part of the relief available through a municipal bankruptcy proceeding. This article will explore the desirability of granting more comprehensive powers to bankruptcy courts and will consider the constitutional authority for such an expansion of Chapter IX. It will also advance specific suggestions for this modification of Chapter IX.