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While in many ways similar to other forms of bankruptcy reorganization (Chapters 11, 12, and 13), Chapter 9 has a number of unique characteristics. Because municipalities are entities of State governments, the power of Congress to adjust their debts through bankruptcy is limited considerably by the 10th Amendment.

History

Previous to the creation of Chapter 9 bankruptcy the only remedy when a municipality was unable to pay its creditors was for the creditors to pursue an action of, and compel the municipality to raise taxes. During the Great Depression this approach proved impossible so in 1934 the Bankruptcy Act was amended to extend to municipalities.The 1934 Amendment was declared unconstitutional in Ashton v. Cameron County Water District, however a similar act was passed again by Congress in 1937 and codified as Chapter X of the Bankruptcy Act (later redesignated as Chapter IX). Chapter IX was largely unchanged until it was amended in 1976 in response to New York City's financial crisis. The changes made in 1976 were adopted nearly identically in the modern 1978 Bankruptcy Code as Chapter 9.

Since 1937 there have been fewer than 600 municipal bankruptcies.