Can a Kentucky County File Bankruptcy to Restructure its Debt? Yes, with State Approval

By: Laura Day DelCotto

I recently had a conversation with a contact from eastern Kentucky, who told me that the County Judge Executive of his particular county had stated that county governments in Kentucky are prohibited from filing for bankruptcy.   That is incorrect.  While none of the 120 Kentucky counties have ever before filed for bankruptcy, and presumably no local government wants to be the first in this regard, they are each permitted to do so, with some prior approvals from the state. Let’s review and make sure our local leaders have the information they need. 

Under federal bankruptcy law, chapter 9 may be voluntarily filed by any “municipality,” which is defined as a “political subdivision or public agency or instrumentality of a State.” 11 U.S.C. Sections 101(40) and 109(c)(1).  Second, the State must have its own state laws which permit and authorize bankruptcy filings by public agencies. 11 U.S.C. Section 109(c)(2).  About half of the 50 states do permit municipal filings, including Kentucky.

Kentucky’s KRS Section 66.400 authorizes “any taxing agency” or “instrumentality” to file for chapter 9 relief. Chapter 9 is somewhat akin to a chapter 11 proceeding, filed to restructure and reorganize ongoing financial affairs to a manageable level.  No county may file “unless the proposed plan is first approved by the ‘state local debt officer’” as defined in KRS 68.001.  Thus, in Kentucky, a county may file a chapter 9, but will end up working quite closely with the Department of Local Government in all aspects of the proposed plan to rehabilitate and restructure its finances, before and after any filing.   

Many of our cities and counties are struggling, with both lower revenues as well as costs which continue to inflate, not the least of which are the pension obligations.  The local citizens are in financial distress and raising taxes is neither popular nor enough.  The Appalachian Regional Commission (ARC) recently released its annual economic status report for all 13 states within the Appalachian region.  54 of Kentucky’s 120 counties fall within the ARC region, and out of the ARC’s 80 so-called “distressed counties,” 39 of them are located in Kentucky. 

(ARC) recently released its annual economic status report for all 13 states within the Appalachian region.  54 of Kentucky’s 120 counties fall within the ARC region, and out of the ARC’s 80 so-called “distressed counties,” 39 of them are located in Kentucky. 

Of the 80 counties that will be considered economically distressed by the Appalachian Regional Commission in 2020, nearly half are in Eastern Kentucky. 
APPALACHIAN REGIONAL COMMISSION
Source: Herald Leader

Both chapter 11 and chapter 9 are costly legal proceedings of last resort.  While many commendable efforts are ongoing to bring jobs and fiscal strength to Kentucky, consideration of chapter 9 is also one option, bringing all parties in interest to the same table to share the available resources.  County officials need to know that the formulation of a bankruptcy plan is an option to be considered, and might just be the best way forward to provide some certainty for the future.   

About DelCotto Law Group

DelCotto Law Group is Kentucky’s asset protection law firm known for its commitment to the lifetime success of its clients. With offices located in Lexington, Louisville and Danville, DLG serves Kentuckians with complicated financial matters, especially in the areas of bankruptcy, complex litigation, and estate planning. For more information about filing bankruptcy or DelCotto Law Group, please call (859) 231-5800 or email info@dlgfirm.com.

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