If your business is behind on its bills and you have been reading up on bankruptcy, you may have run across Chapter 9 and wondered whether it could help you. The short answer, in 2026 as in every year before it, is no. Chapter 9 is available only to government agencies, so your small business cannot. Nevertheless, there are ways to handle your business debt. Knowing what Chapter 9 is, and why it was built the way it was, makes it easier to see which of those ways fits.
Municipal Bankruptcy
So what is Chapter 9? Chapter 9 of the Bankruptcy Code is what a city (or other municipal unit) files when it wants to seek court protection from its creditors. It is often called municipal bankruptcy. If a city or other unit of local government makes a promise to pay a bondholder, that promise has to be kept. But cities, too, have bills to pay, so sometimes they cannot pay their bondholders. Chapter 9 was put into law in 1937 for the specific purpose of letting cities seek bankruptcy protection without having to stop providing their residents with police, fire, water, and other public services. Chapter 9 is designed to help local governments when they are in financial trouble - to keep the garbage trucks running, the lights on at the hospital and the police patrols in place, all while they reorganize their debts. A city doesn’t run to bankruptcy court to destroy its debts. Like the individual Chapter 13, it’s a way to restructure debts while remaining protected by a court from creditors. But it has to file a plan.
Who counts as a municipality? Cities, counties, school districts and other tax-funded public bodies, such as bridge, highway and gas service authorities, can qualify. A state is not a municipality, and states cannot file at all. Even a city cannot file under Chapter 9 unless state law or an authorized state official specifically gives the city or town permission. That requirement sits in Section 109(c) of the Bankruptcy Code. Some states have an additional rule: The municipality must attempt to negotiate a deal with its creditors first. In Chapter 9, it is up to the city, the county, the school district or any other municipality to sign the petition to go into bankruptcy. No one can force them into it. The filing must also be made in good faith, by a municipality that genuinely means to carry out a plan rather than one trying to put off paying its creditors.
A Chapter 9 does not liquidate assets, unlike other bankruptcy cases. The city keeps its property; it simply negotiates a deal that lowers the immediate debt burden on its balance sheet. The protection imposed by Chapter 9 isn’t endless. In municipal bankruptcy, the debtor proposes its own plan of reorganization, and the court must confirm or reject it (with input from the other parties). If the court rejects the plan, it can dismiss the case, and the protection ends.
The biggest advantage of Chapter 9 is simply time — to come up with a plan — as well as protection from creditors suing and making various demands. The drawback: the second you file, you automatically face the possibility of having your credit ratings downgraded, making any new borrowing cost more. Cities don’t like to go to bankruptcy court. They don’t like it, they don’t even want to talk about it. When a crisis hits, local politicians in most cities don’t head for Chapter 9. Instead, they struggle mightily to keep a default from ever happening. Without a mechanism to file for Chapter 9 bankruptcy, municipalities have no choice but to work out their debts by negotiating with creditors, sometimes through a restructuring agreement or a refinancing package.
Chapter 9 cases are also rare. Fewer than 700 have been filed in the chapter’s whole history, and 171 local governments have filed for protection since the year 2000. The busiest year was 2012, with 20 municipal bankruptcies. If you hear the word “municipality” in connection with a bankruptcy case, you’re probably hearing about a small local government, like a utility or water district, not Los Angeles or New York City. Irrigation, waste disposal and hospital districts make up much of the list. Now and then a large one makes headlines, as Orange County, California did with its 1994 filing, which involved debts in the millions.
What Can a Small Business Do
That’s nice, but that’s not me. What can a small business do? Small businesses are not eligible for Chapter 9, even if they’re drowning in debt. If you own a small business that runs out of money and tries to cover its expenses with more debt, or if you’re an individual who needs to lay out all your financial cards on the table, Chapter 9 is not your option. For a company, the bankruptcy route runs elsewhere. The more applicable relief is a reorganization of the corporate entity, which falls under Chapter 11. Chapter 13 is generally for individuals and families. Chapter 11 is an animal all its own. We’re not experts on how it works, and a bankruptcy attorney is the right person to explain whether it fits your situation.
Rework Your Accounts Outside of Bankruptcy
So, what did business owners learn from reading about Chapter 9? That bankruptcy is a last resort, even for a city, and that the first move is usually to sit down with the people you owe. The initial advice to all our readers who are in the red is to try and rework your accounts outside of bankruptcy. Work something out in private, either new terms or a one-time settlement of the debt, before you go to court. If possible, go to them first. You always look more sympathetic if you do. Many companies think twice before filing, because they know the costs can be pretty high, even long-term. To judge whether a bankruptcy is a good idea, the first thing to consider is how the act itself will affect the prospects for your business. Can you stay in business? How long will it take to get through bankruptcy court and back to normalcy? And would creditors see the bankruptcy as a damaging reflection on your business and its future? There is also the intangible reason: Not wanting to be labeled “a bankrupt business” in the minds of future customers.
If you’re wondering if Chapter 9 should be about your debt problems, you’re thinking in the wrong direction. Use these facts to understand that a different chapter is more suited to your situation. More than that, understand that your one best alternative to a legal filing is really the one you should try first. You should be able to look at your options and figure out how to stay out of bankruptcy. Chapter 9 will never be on your list. A negotiated settlement, worked out before any court gets involved, should be. Think about what you’ve learned from this article, and think about talking to creditors right away.
