First some history
A decade ago, Orange County entered the record books by becoming the largest municipal government in U.S. history to declare bankruptcy. This crisis stemmed from the county's inability to pay back billions of dollars in debts incurred by the county treasurer. A risky investment strategy that was supposed to provide interest income for cash-starved local governments had badly backfired. Left without viable alternatives - and with both state and federal officials ignoring their pleas for help - Orange County government officials decided to file for Chapter 9 bankruptcy on Dec. 6, 1994.
http://www.ppic.org/main/commentary.asp?i=532
Texas Law
CHAPTER 140. MISCELLANEOUS FINANCIAL PROVISIONS AFFECTING MUNICIPALITIES, COUNTIES, AND OTHER LOCAL GOVERNMENTS
Sec. 140.001. RELIEF UNDER FEDERAL BANKRUPTCY LAWS FOR MUNICIPALITY, TAXING DISTRICT, OR OTHER POLITICAL SUBDIVISION.
(a) A municipality, taxing district, or other political subdivision that is subject to this section may proceed under all federal bankruptcy laws intended to relieve municipal indebtedness.
(b) A municipality is subject to this section if it has the power to incur indebtedness through the action of its governing body. A taxing district or other political subdivision is subject to this section if it has the power to incur indebtedness either through the action of its governing body or through that of the county or municipality in which it is located.
(c) The officials and governing body of the municipality, taxing district, or other political subdivision may adopt all proceedings and take any action necessary or convenient to fully avail the entity of the federal bankruptcy laws.
Acts 1987, 70th Leg., ch. 149, Sec. 1, eff. Sept. 1, 1987
http://www.capitol.state.tx.us/stat...0.000140.00.doc
It has been done. This means it can be done!
Municipal Insolvency- Federal Law Allows
Municipalities are typically subject to two sets of potentially applicable insolvency regimes, one state and the other federal. State law governing municipal insolvencies can take myriad forms, including financial emergency and oversight laws and judicial receivership statutes.8 Federal law governing municipal insolvencies is set out in the Bankruptcy Code, particularly Chapters 1 and 9 thereof.9 Federal law makes clear that a municipality may be a “debtor” under the Bankruptcy Code only on a voluntary basis and then only to the extent that state law or a state officer empowered by state law specifically authorizes the same.10 Thus, state law must be referenced to determine whether and how a municipality might become a debtor under the United States Bankruptcy Code.11 Should the need arise, a municipality’s incentive to avail itself of the Bankruptcy Code (as opposed to state insolvency regimes) comes from (i) the benefits of the “automatic stay” provided under the Bankruptcy Code,12 and (ii) the ability to impose a binding debt reduction plan on creditors.13
http://www.hklaw.com/Publications/N...00&Article=3193
Yes We can do it!
New York State Consolidated Laws
Local Finance
S 85.30 Petition of municipality; temporary stay of claims. A
voluntary petition may be filed pursuant to this section by any
municipality or, in the event a municipality refuses to file such
petition after request by its emergency financial control board, or
fails to do so within five days thereafter, the board may file a
petition pursuant to this section on behalf of the municipality. The
petition shall be filed in the supreme court in a county in which the
municipality is located. The petition shall state: (a) that the
municipality is unable to pay its debts or obligations as they mature;
(b) that the municipality or its emergency financial control board
intends to file with the court a repayment plan in compliance with the
requirements of section 85.40 of this title; (c) the nature of the debts
and obligations of the municipality which may be affected by the plan
and the approximate amount thereof; and (d) the identities and addresses
of creditors who may be affected by the plan or, in lieu thereof, the
reason such identification is impracticable and a listing of creditors
in a manner that is practicable in the circumstances. A petition filed
pursuant to this section shall operate to prohibit the doing of any act,
and to stay the commencement or continuation of any action or special
proceeding in any court in any jurisdiction, seeking to apply or enforce
against the municipality or any covered organization, or their funds,
property, receivables or revenues, any order, judgment, lien, set-off or
counterclaim relating to any contract, debt or obligation, direct or
indirect, of the municipality, including but not limited to any bond,
note or other evidence of indebtedness, or seeking the assessment, levy
or collection of taxes by or for the municipality or the application of
any funds, property, receivables or revenues of the municipality or any
covered organization, for a period of ninety days; provided, however,
that: (i) the stay may be vacated prior thereto if, upon motion of any
creditor affected thereby, the court finds, after a hearing, that the
petition was not filed in good faith; (ii) if a repayment plan for the
municipality is filed within ninety days from the filing of the
petition, or within such additional period of time as the court may find
after a hearing is required to permit the preparation and filing of such
a plan, the court shall extend the stay for such additional period of
time as is required to permit the court to enter an order pursuant to
section 85.40 of this title; (iii) any applicable statute of limitations
shall be tolled during the period of any stay or extension thereof
pursuant to this title; and (iv) during the period of any stay or
extension thereof pursuant to this title, the municipality may expend
moneys to maintain and provide such services and for such purposes as
are determined to be necessary by its emergency financial control board.
http://caselaw.lp.findlaw.com/nycodes/c59/a10.html
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