Harrisburg, Pennsylvania tried to join the growing number of municipalities who have exercised their right to file Chapter 9 bankruptcy; but now they face legal challenges by the state. Seeing that the city was poised to file bankruptcy, the governor and state legislature designed a law to stop Harrisburg, now they want a U.S. bankruptcy judge to throw out the Chapter 9 bankruptcy and allow creditors to come after the municipality.
If the bankruptcy is thrown out, the city will lose protection from creditor lawsuits and be forced to respond to any court actions filed related to its debt. The City Council would have the right to appeal the decision, their attorney, Mark Schwartz said in an e-mail.
One of those creditors, Ambac Assurance Corp. strongly opposes the city's bankruptcy filing despite the fact that the creditor's parent company has enjoyed the protection and benefits of Chapter 11 bankruptcy. Ambac wants the municipality to forgo bankruptcy protection in favor of having its scarce assets picked over by creditors under the flimsy "protection" of receivership. Of course that's to be expected, it is why we have the bankruptcy system in place to protect businesses, individuals and municipalities from creditors who would gladly destroy debtors just to receive every last penny owed.
If we allow states to enact laws preventing municipalities from seeking protection from creditors in Chapter 9 bankruptcy, how long until we see state and local rules spring up to restrict individual and business debtor's rights to bankruptcy? If creditors feel that they will benefit from restricting bankruptcy access and have the power to do so, why would they restrain themselves? As we witnessed during the 2005 bankruptcy reform, creditors are willing to throw their money behind any laws that make it more difficult for people to free themselves from the stranglehold of debt.