Unlike the city of Detroit, the state of New Jersey cannot declare bankruptcy. Federal bankruptcy laws don’t allow it.
“It’s not provided in the federal bankruptcy laws. There is a provision for municipalities and any other kind of organization in the state to go bankrupt, but not the state itself,” said Professor J. Fred Giertz, an economist who is director of the University of Illinois’ Institute of Government and public Affairs.
And although there has been some talk of changing federal law to permit states to reorganize their financial obligations through bankruptcy, it hasn’t gone far.
“In the United States we have a federal system where the states have powers that are protected from the national government, so there’s a real question about supremacy and whether the federal government can impose bankruptcy rules on the state, which is supposed to have powers that are protected from the federal government,” Giertz said. “I don’t think there’s any likelihood it’s going to be approved by Congress anytime soon.”
• The state itself cannot file for bankruptcy under the U.S. Bankruptcy Code.
• Municipalities cannot file for bankruptcy under the U.S. Bankruptcy Code without approval of the state (See N.J.S.A. 52:27-40).
• The state has in the past made it clear that they would not approve such a filing by a municipality. There are red flags under state law that identify when a municipality is experiencing financial difficulty. Such a municipality must appear before the Local Finance Board with a financial recovery plan.
• It is unclear, at best, whether the major costs affecting municipalities for unionized contractual obligations can effectively be terminated, changed or even renegotiated by virtue of Chapter 9 of the U.S. Bankruptcy Code. These obligations seem to be the driving force behind bankruptcy filings by local governments in other states, but they do not appear to have been successful in creating leverage in such contractual negotiations. The lack of ability to reorganize or dissolve that enables private corporations to bring their creditors to the table for serious negotiations as leverage may not exist under Chapter 9.
