D.1.3 Advantages and Disadvantages

A Chapter 9 proceeding offers an eligible public agency several advantages:

Protection From Creditor Actions. The automatic stay prevents individual creditors from pursuing disruptive remedies and allows the public agency breathing space to negotiate with all creditors in a considered manner.
Single Forum. A bankruptcy case allows all claims and legal issues to be addressed in a single place under the supervision of an expert judge.
Adjustment of Obligations. The public agency’s ability to reject certain unfavorable contracts and leases and to reduce or defer obligations affords an opportunity to work with creditors to establish a financially sustainable operating model.

A bankruptcy case, however, also has significant disadvantages:

Adverse Credit Market Reaction. A public agency seeking bankruptcy relief should expect suspension or downgrading of its credit ratings. The bankruptcy taint may impact not only the public agency’s access to capital markets during the pendency of the bankruptcy proceeding but, unless debt holders are fully paid, for many years thereafter.
Cost. Bankruptcy proceedings are very costly in terms of legal and advisory fees and staff time. Resources directed to a bankruptcy proceeding are resources not available to address important public needs.
Community Stigma. “Bankruptcy” can impact public confidence and the local business climate, the effects of which are difficult to calculate but could be significant.

In sum, bankruptcy may be an inevitable and useful tool for a public agency with financial difficulties that cannot be addressed any other way. It is far better, however, for a public agency to address an intractable financial situation when actual insolvency is still far down the road.