To file, or not to file?

The Jefferson County case, coupled with bankruptcy proceedings in Harrisburg, Pa., also has spurred a debate on whether Chapter 9 works best for struggling governments. In Harrisburg, a federal bankruptcy judge in November threw out the city's Chapter 9 filing for technical reasons, and the state is now moving to take over the city's finances.

Some lawyers believe that rather than spurning the Chapter 9 process, more government leaders should take advantage of the courtroom as the best means to extract themselves from seemingly intractable financial crises while maintaining essential services. Patrick Shea, a lawyer and strategic advisor in private and public sector financial structures, argues that complicated cases outside of the bankruptcy process can run on for 10 or 20 years, while Chapter 9 can complete the process in two years or less. He notes that Orange County came out of its Chapter 9 proceeding in 18 months, with its credit rating restored. "Chapter 9 is the only way to get all the interested parties in one place at one time and collectively resolve the financial situation," he says. "It doesn't happen outside of Chapter 9."

However, Deryck Palmer, an attorney who specializes in cases related to financial restructuring, argues for negotiated restructuring outside of Chapter 9 proceedings. He says such a process, long used in the corporate world, works because the various interests agree to the outcome rather than reluctantly accepting one that is imposed by a judge. "It depends on all parties having a common desire to reach a consensus," he says. "Everyone has to make some sort of sacrifice."

Robert Barkin is a Bethesda, Md.-based freelance writer.