Chapter 9 of the Constitution: Bankrupcy

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In order to fully understand the complex issues underlying a Chapter 9 bankruptcy, it is necessary to comprehend the unique United States constitutional challenges to municipal bankruptcy. The main constitutional issue can be boiled down to a clash between State sovereignty over its municipal entities as protected by the Tenth Amendment, and the necessity of a federal bankruptcy system. Any power asserted by a federal bankruptcy court over a State municipality can, if taken too far, interfere with the State’s constitutional right to control its municipality. It is this clash of State sovereignty and federal bankruptcy power that is the essence of Chapter 9’s unique construction. Under the United States Constitution, any valid bankruptcy system must be federally enacted. Two separate provisions of Article I necessitate this conclusion. Article I, Section 10, Clause 1 of the Constitution prohibits any state from passing, “. . . any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, . . . .” No bankruptcy system can realistically exist without the ability to impair the obligations of contracts. The entire purpose of a bankruptcy proceeding is to allow a financially distressed debtor to discharge its debt obligations after paying off as much of its debt as possible. A large majority of a municipal debtor’s debt will come from some contractual obligation that the States are explicitly prohibited from impairing. Therefore, Article I, Section

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