Can States Declare Bankruptcy?
State cannot, under current Federal Bankruptcy Law, file bankruptcy.
But Mitch McConnell would support states being able to file bankruptcy. In a Washington Post
article written by John Wagner, April 23, 2020 at 7:25 p.m. EDT, McConnell stated he would be in favor of allowing states to file if they were adversely affected by COVID-19.
In the last 20 years, there have been a total of 36 cities, towns, and other municipalities that have filed for bankruptcy. You probably remember hearing or reading about them in the news: Detroit, MI filed bankruptcy as a city in 2013 with $18.5 billion in debt, Jefferson County in Alabama became a Chapter 9 debtor in 2011 with $4 billion on the line, and Stockton, CA became unable to meet pension obligations for retired state employees in 2012 owing in total $1 billion in debt obligations.
While Chapter 9 bankruptcies are rare, bankruptcy itself is the most common form of debt relief in the United States. In fact, hundreds of individuals and companies who can’t pay back debt use declare bankruptcy every day in America. And why not, the US Bankruptcy Code is an example that many other countries across the globe attempt to emulate. The Federal bankruptcy code even allows municipalities such as towns, school districts, and hospitals to eliminate debt using a special designation of the bankruptcy code called Chapter 9 bankruptcy.
What Happens When a State Can’t Pay its Debts?
Bankruptcy law doesn’t allow states to declare bankruptcy. At least, they haven’t allowed states to do so yet. If states aren’t legally able to declare bankruptcy, then what do states that have become insolvent such as the United States? After all, states are obligated to many long-term debts such as state healthcare, life insurance payouts, government services, and pension plans. If a state can’t pay its debts it must cut funding to services and pension plans when legal. Some states, such as Illinois, have state laws preventing reducing pension payouts.
States in Danger of Serious Default
If you ask experts in the fields of finance, industry, investing, and marketing, which states would file bankruptcy if given the opportunity? Look close enough, and a few states are a prime candidate for bankruptcy based on pension shortfalls and other financial obligations. These states which hold the highest in total debt and unfunded pension liabilities include Connecticut, Massachusetts, New Jersey, Illinois, Kentucky, and Hawaii. Connecticut ranks number one in the nation for state with the highest debt deficit per capita.
While states can’t officially declare bankruptcy, this may change someday in the future. This means that if you are a state employee or receive a pension, your finances might be affected. US Bankruptcy Code does, however, allow both individuals and business to shed excessive debt while sheltering some or all of your assets such as retirement benefits, homes, and automobiles. If you’re struggling with debt you can’t repay, contact a Dayton, OH Bankruptcy attorney to discuss your options.