Bankrupt States


There’s beginning to be a bit of noise about the possibility of states going bankrupt, but current bankruptcy law doesn’t provide for state bankruptcies. A state could default on its debts, but its creditors only real recourse would be to stop providing goods or services to the state government.

There have been several proposals floated for Congress the enact a new chapter in the Bankruptcy Code that would allow for state bankruptcy. However, the Eleventh Amendment prohibits citizens of one state suing another state in a federal court. IANAL, but that seems to prohibit out-of-state creditors from having standing in Bankruptcy Court. Also, Article IV, Section 4 requires the United States to guarantee “a Republican Form of Government” to each of the states. Placing a state under the control of a receiver in bankruptcy would likely violate that requirement.

So it may be that states can’t go bankrupt. But perhaps a territory can because territories don’t have the protections of the Eleventh Amendment and Article IV. Maybe Congress could enact legislation to allow for territorial bankruptcies and to allow insolvent states to revert to territorial status to go through bankruptcy. Of course, a state using the process would become a territory and lose its Senators and all of its Representative, but it should be allowed a non-voting delegate in the House, and after it had put its affairs back in order, it could apply for readmission to the Union.

Given that the states with the greatest insolvency problems are blue states, … oh, never mind.

1 thought on “Bankrupt States

  1. The territorial bankruptcy structures are already in place via the PROMESA legislation being utilized as to Puerto Rico. This could get exciting.

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