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Bankruptcy Law Blog

Friday, June 26, 2020

Can States File For Bankruptcy?

Individuals and families can file for bankruptcy. Businesses can file for bankruptcy. And at least a dozen cities, counties, or governmental agencies in Alabama have filed for bankruptcy since 1981. But what about states?

Is it possible for states to file for bankruptcy?

In the midst of the COVID-19 pandemic, some government leaders have suggested that it may be better to have states file for bankruptcy than offer them a federal bailout. This has caused a lot of debate, and raised a bunch of questions about our nation’s bankruptcy system.

In a recent interview, Senate Majority Leader Mitch McConnell said, “I would certainly be in favor of allowing states to use the bankruptcy route. It saves some cities. And there's no good reason for it not to be available.” President Trump then chimed in on Twitter in support of the idea, asking why taxpayers should bail out “poorly run states.”

 

Why can’t states file for bankruptcy already? There is no law that allows them to do so. Since the late 1930s, federal bankruptcy law has allowed “municipalities” to file for bankruptcy under Chapter 9 of the bankruptcy code, but states do not meet the definition of the term “municipality.” States would also need to pass laws that give themselves the power to declare bankruptcy, which some have suggested might be unconstitutional.

As the coronavirus crisis drags on, the idea of allowing states to file for bankruptcy might be something policymakers take a closer look at. It’s an intriguing idea when you consider how helpful our bankruptcy laws are when an individual or family is struggling.

Filing for bankruptcy under Chapter 7 can quickly give debtors a fresh start. The average case takes around 3 months to work its way through the court system. During that time, unsecured debts like credit card debt and medical debt are wiped away. Collectors and creditors will be forced to stop calling, which gives debtors some room to breath. Most filers also get to decide if they want to try and catch up on home and car payments, or give those assets up and start over with a completely clean slate.

Individuals and families who choose to file under Chapter 13 of the bankruptcy code are able to renegotiate and consolidate their debts, then put on a court-supervised repayment plan that helps them catch up on back payments and take control of their debt. The plan lasts several years, and at the end of that time some remaining debts are forgiven.

One of the great things about this multi-chapter system is that it allows debtors the freedom to pick a chapter and a path forward that works best in their specific circumstances. Debtors can also choose to file individually or as a family. If a debtor owns a business, personal and business debts can be kept separate so either the person, the business or both can declare bankruptcy. There are many options to consider when thinking about filing for bankruptcy.

It might be time for policymakers to consider offering similar options to states. While we wait and see what happens, the Padgett & Robertson team will continue to help individuals and families in the Mobile area get debt relief and build a better tomorrow.


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Padgett and Robertson assist clients with Bankruptcy, Personal Bankruptcy, Consumer Bankruptcy, Chapter 7 Bankruptcy, Chapter 13 Bankruptcy and The New Bankruptcy Law in Mobile, Alabama and throughout southern Alabama. Alabama State Bar Association Regulations require the following: "No representation is made that the quality of the legal services to be performed is greater than the quality of legal services performed by other lawyers." 11 U.S.C. 528 of the U.S. Bankruptcy Code requires the following: "We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.”



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Alabama State Bar Association Regulations require the following: "No representation is made that the quality of the legal services to be performed is greater than the quality of legal services performed by other lawyers." 11 U.S.C. 528 of the U.S. Bankruptcy Code requires the following: "We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.”