Wednesday, March 10, 2010

Can California Declare Bankruptcy?


California passed a gas tax last week to help make up for its nearly $20 billion budget gap, the latest in a series of measures to right the state's teetering economy. The country of Greece is in even worse shape, with accumulated debt higher than 110 percent of GDP, set to reach 125 percent this year. Can a state declare bankruptcy? Can a country?

No and no. Chapter 9 of the U.S. bankruptcy code allows individuals and municipalities (cities, towns, villages, etc.) to declare bankruptcy. But that doesn't include states. (The statute defines "municipality" as a "political subdivision or public agency or instrumentality of a State"—that is, not a state itself.) For one thing, states are said to have sovereign immunity, as protected by the 11th Amendment, which means they can't be sued. In other words, they don't need any protection from angry creditors who would take them to court for failing to pay their debts. As a result, states can simply borrow money ad infinitum. (more)

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