The Difficult Path to State Bankruptcy

Abstract

A growing number of state governors are voicing concern about the damage inflicted on their states’ budgets—on both the revenue and the expenditure sides—by the COVID-19 pandemic. The situation is particularly dire for the many states that entered the current crisis with “preexisting conditions” that render them less able to cope with these challenges owing to repeated failures in addressing their budget issues.In this context, the idea has resurfaced of expanding Chapter 9 of US bankruptcy code—which allows cities, counties, and other state municipalities to file for bankruptcy—to allow state governments to file for bankruptcy. This brief raises the question: Would allowing states to go through the bankruptcy process overcome the political obstacles that legislatures and governors face and finally create the conditions for financially troubled states to rectify their financial conditions?