Puerto Rico and Chapter 9 Bankruptcy

Posted on Feb 09, 2016 By Kathryn Davis

Kathryn DavisI have previously discussed the basics of a Chapter 9 bankruptcy as well as two Chapter 9 bankruptcies that occurred in Alabama.  In this post, I’ll examine a current event that involves a discussion of Chapter 9- Puerto Rico’s current debt crisis.

Puerto Rico Financial Crisis

The United States territory of Puerto Rico is in the midst of a financial crisis. The governor of Puerto Rico has repeatedly asserted that the island cannot pay back all its debts.  Puerto Rico currently has about a $72 billion debt load.  Besides its large debt, Puerto Rico faces other economic hurdles, including a 45% poverty rate and a decreasing tax base as a large number of citizens flee to the United States.  In January of this year, Puerto Rico defaulted on a second bond payment.  This debt crisis has the potential to inflict much harm on Puerto Rico as well as the U.S. economy.

One possible solution to this debt crisis would be to allow municipalities in Puerto Rico to file for a Chapter 9 bankruptcy.  As the bankruptcy law is written, Chapter 9 relief is not available to Puerto Rico.  Unlike U.S. States, the territory of Puerto Rico does not have the power to authorize its municipalities to declare bankruptcy.  Indeed, Puerto Rico’s access to Chapter 9 was written out of the Bankruptcy Code in 1984.  Currently, bills have been introduced in the House and Senate that could extend Chapter 9 bankruptcy to Puerto Rico.  Additionally, President Obama wants Congress to amend its laws to allow the island to declare bankruptcy.

There are several arguments that opponents of allowing Puerto Rico to access Chapter 9 assert.  One argument is that allowing relief under Chapter 9 would be like a bail out and would reward Puerto Rico for being in such large debt.  Another argument against allowing Puerto Rico to file under Chapter 9 is that while bankruptcy would help restructure the debt, Puerto Rico would still need to greatly reduce its spending and slim down its government operations in order to stay out of financial trouble.  Some of these opponents argue that the creation of a federal board to oversee Puerto Rico’s finances is the better long term solution.

On the other hand, Chapter 9 provides a tried and true mechanism to pull Puerto Rico out of its debt crisis.   Investors are familiar with Chapter 9 and there are examples of Chapter 9 successes throughout the country.  Allowing Puerto Rico’s municipalities to file for bankruptcy might be a solution to its debt problem.

Whether providing Puerto Rico access to Chapter 9 is the best path, it will be interesting to see what Congress does on this issue.  Whatever Congress’s decision, hopefully Puerto Rico comes out of its debt crisis soon and the government and citizens of the territory are provided some relief.

If you have questions about your personal debt crisis, please contact one of our offices and set up a free consultation today.