The rights for states to declare bankruptcy gaining momentum in Washington Skip to main content

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The rights for states to declare bankruptcy gaining momentum in Washington


Can states file for bankruptcy protection? That's the question being considered by many Washington leaders. Currently, municipalities (cities, counties and towns), can file for protection under Chapter 9 of the bankruptcy code. States do not have such an option. Yet. Many believe the primary driver of the concept to be former Speaker of the House and current political pundit and potential presidential race contestant Newt Gringrich. A recent speech he gave on the matter may have had some influence, but regardless of his politicizing of the idea, many of our states are struggling beneath monumental debts. Also adding pressure to lawmakers to formalize the idea is the fact that a number of Congressmen believe that it won’t be long before a state seeks a federal bailout. It would be better to have an actual plan in place before that scenario happens. Texas lawmaker John Cornyn has reportedly sought input from Federal Reserve Chairman Ben Bernanke about having a hearing on the matter as soon as this month. A state filing for bankruptcy could create a number of long-term issues for its citizens. Primarily, those people who currently or will soon receive pensions from years of state work would be left with very little, if any, source of income. A state-sponsored retirement plan is one of the largest financial commitments for any state. State employee groups and unions are afraid that a bankruptcy could provide state governments with unfair leverage when bargaining for retirement and pay plans. And then there are state constitutions to consider, many of which state that breaking contracts with employees, such as a pension plan, would violate long-standing laws. Across the country, states are having to raise taxes and cut services in countless, critical areas in order to maintain some sense of economic stability. Here in North Carolina, the state is toying with the idea of mass teacher layoffs. NC State, UNC-Chapel Hill and consequently many more campuses within the University of North Carolina system are also discussing the collective elimination of thousands of jobs, not to mention valuable degree and student programs. In some cases, entire colleges within some of the schools would have to be closed. North Carolina, considered one of the nation’s healthiest states from an economic perspective, is facing a budget shortfall of more $3.5 billion. The North Carolina Department of Public Instruction predicts that Wake County, the state’s largest school district, could experience up to 360 teacher positions eliminated. There is hope that an expected increase of 4,000 students (another sign of how many people are moving here each year) could lend credence to the argument that the positions should remain intact. After all, that kind of teacher to student deficit could wreck havoc on the county’s quality education reputation. More motivation for creating a state bankruptcy addition to the federal code is coming from a paper published by a University of Pennsylvania professor. In it, David A. Skeel said that the conflicts with the constitutionality of state bankruptcy could be easily solved and that Chapter 9 bankruptcy provides a logical model on which to base such a measure. After his paper was published, Skeel said he was contacted by a number of politicians from both sides of the aisle, suggesting that the idea could be supported by both parties Brought to you by the Law Offices of John T. Orcutt. Are you struggling with debt? In North Carolina, call +1-919-646-2654 to schedule your free initial debt consultation. Offices in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington North Carolina

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