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The Watercooler ~ More on Chapter 9 Bankruptcy In Stockton

Normally, I am not interested in the minutiae of bankruptcy law and court proceedings. But, the prolonged recession resulting in severe fiscal stress on municipalities across the nation has made the subject pertinent and learning what is at stake has become interesting.

This morning’s piece by Dan Pellessier, President, California Pension Reform, is the most comprehensive article I have read on the subject covering the history of bankruptcy law in the U.S.:

Our Founding Fathers recognized the importance of giving debtors an orderly process to cancel unbearable contracts, divvy up their limited assets between creditors and start over. Debtor prisons were not very effective and the states wanted to be sure their citizens would be treated fairly throughout the nation. Through the US Constitution’s “Enumerated Powers” (Article 1, Section 8) they gave Congress the power “to establish uniform Laws on the subject of Bankruptcies throughout the United States.”

For more than a century, the powers of bankruptcy court were only available to individuals and corporations. The Great Depression proved government agencies also needed to break contracts and adjust their debts, so Congress gave municipalities access to bankruptcy court by establishing Chapter 9 in 1937. The depth of the economic distress made the previous remedy of judicially imposed tax increases ineffective. To date, more than 600 insolvent municipalities have found relief in bankruptcy court.

The article goes on to make clear what is at stake in the Stockton bankruptcy case, and why it matters to the rest of us as well as how it could impact all of us. It is well worth the read if you are so inclined.

The Watercooler is always an open thread.

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