Bankruptcy has become an acceptable and, in many cases, successful way for debt-burdened companies and consumers to get a fresh start. Airlines do it. Auto companies do it. Retailers do it. More than 1.6 million American households are expected to do it this year.
Buckling under crippling debts, state and local governments are unlikely to file for bankruptcy, but the alternatives could be worse, says WSJ’s David Wessel.
But reneging on debts remains a rarity among U.S. state and municipal governments. Fewer than 250 of the nation’s 89,000 local governmental units have filed for bankruptcy since 1980.
Recent close calls in Harrisburg, Pa., and Central Falls, R.I., spark predictions that the next phase of the financial crisis will be a tsunami of municipal bankruptcies and defaults. Muni-bond experts at rating agencies and bankruptcy lawyers assure us that isn’t likely.
We’ve learned in the past few years to be skeptical of such assurances, but the experts probably are right on this one. Not because state and local finances are in good shape–they aren’t–but because Chapter 9 of the bankruptcy code, the one that applies to local governments, is so unwieldy.
Dean Mosiman: City government borrowing triple 10 years ago.