Chapter 9 is a form of bankruptcy filing that is reserved for municipalities which have defaulted on their debt obligations.

This could include a school district or other entities which have a municipal affiliation and the ability to generate revenue from local taxes. They cannot be made to liquidate anything. In fact, it forces the lender to accept a refinancing of the debt obligation.

Because municipalities fall under state jurisdiction, the federal government, which governs bankruptcy court, does not have the ability to force liquidation of a municipal entity’s assets. Instead, this provision of bankruptcy law governs refinancing arrangements to facilitate the repayment of debts owed.

This may require that lenders accept a smaller principal amount or reduced loan interest, or that they stretch the repayment schedule out, or a combination of these. The most common situation where this would be a problem is if a municipal entity defaulted on a municipal bond obligation.