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Until the 1930s, it was legally impossible for US cities to declare bankruptcy. Municipal legislation permitting it didn't exist. The 1934 Bankruptcy Act changed things. Cities and municipalities were included.
Earlier rules became today's US Bankruptcy Code Chapter 9. It's available exclusively to cities and towns. Municipal bankruptcies don't extinguish debt. Reorganization follows.
Cities can break untenable contracts and get more attractive financing. In 1994, Orange County, CA went bust. It's home to some of the countries most affluent communities. Bad speculative investments caused bankruptcy.
In May 2008, Vallejo, CA declared it. Last-ditch rescue efforts failed. Up to then, a California city that large never took this route. At the time, city manager Joseph Tanner said:
"This has been a long frustrating process for everyone. There are no winners here tonight." Vallejo's city council voted unanimously to approve Chapter 9 bankruptcy protection. Its finances were in shambles.
Across America, cities and towns face the same dilemma. It's not pretty when mayors and municipal managers can't meet payrolls or pay other expenses.
Short of turning out the lights and shutting down municipal government, they reorganize. Life goes on as usual but not easily for many. Ordinary people suffer most. Basic services get scrubbed to the bone. Bare bones resources are left.
Last October, Jefferson County, AL declared Chapter 9 bankruptcy. It's home to the state's most populous city, Birmingham. Its debt exceeded $4 billion. It was America's largest municipal filing in history.
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