Municipal Bankruptcy Law: A Solution Which Should Not Become a Problem

Municipal bankruptcies have received little attention in legal scholarship outside the USA. This is a rather surprising circumstance given the multitude of (large) cases in this area, the magnitude of their consequences, and the lack of international guidelines to resolve them. Cases (‘Rome’ and ‘Detroit’) and laws (Italian and American) discussed in this article prove that different strategies are adopted to deal with local entities in crisis. Procedural (i.e. statutory-based) approaches may prevail over discretionary (i.e. politically-informed) ones; both may affect primarily the interests of creditors or those of the municipality, its residents, and taxpayers. This article is based on the assumption that municipal bankruptcy law should facilitate the reorganization of the distressed entity, since liquidation is hardly an option. The law should also adhere as much as possible to the principles that inform general corporate bankruptcy practice. This article demonstrates the need to clarify the notion of municipality, and to adopt a procedural, reorganization-oriented approach whenever a municipality is no longer able to repay its debts. Bankruptcy practice for municipalities is in urgent need of reform. This paper aims at providing some guidance to navigate these relatively uncharted waters.