Financial bankruptcy (of a school district)
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Financial bankruptcy occurs when an individual, organization, or business accrues more debt or financial hardship than can be paid off. School districts are not immune to budget crises, and there are many options for school districts dealing with debt. While uncommon, schools do have the option of filing for Chapter 9 bankruptcy, or "municipality bankruptcy."[1]
Chapter 9
Chapter 9 bankruptcy, also called municipality bankruptcy, is an option for schools whose leadership cannot cope with financial hardship. Under Chapter 9, schools, along with cities, towns, or other municipal bodies, are given the chance to reorganize their debt. Schools are given time to devise a new financial plan while interest on debt is reduced and loans are refinanced. Once a plan for handling debt is confirmed by a bankruptcy court, that plan is followed until the school is eventually able to reemerge from bankruptcy. Municipality bankruptcies are rare (around 300 have been filed since 1954), they can deal with millions of dollars of debt and can benefit organizations like schools.[1][2]
Other options
Chapter 9 bankruptcy is rare because of the wealth of other options available for financially struggling schools. For instance, some states have laws that enable school districts to break or renegotiate union contracts. A school can also hand leadership over to an "emergency manager," or an expert designated to handle emergency financial situations. Leadership can also be taken by the state, which opens up more options for handling debt or reorganizing the school.[1]
Financial bankruptcy in schools is rare, but it does happen. States and schools typically work together to prevent bankruptcy, but Chapter 9 is an option when others fail.[1]
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