| Southeast of Los Angeles is Orange County, California. It's home to Disneyland, the Richard Nixon Library and Birthplace, and a population with a median income one-third higher than the national median. In December 1994, this wealthy county filed for bankruptcy. It subsequently failed to make timely payments on its debt. Orange County's case brought media attention to municipal bankruptcy and default; however, the issues, especially bankruptcy, have been the subject of relatively little research.; The high default rate during the Great Depression led to the passage of municipal bankruptcy law. Governmental bodies of many types and sizes have since filed for bankruptcy. The paper examines Chapter 9 of the Bankruptcy Code: the conflict surrounding its passage, its evolution, and the use of law. Included is a survey of court rulings, to help understand what creditors can expect. This thesis also supplies a brief overview of municipal bond defaults.; The thesis provides a quantitative estimate of the cost to a municipality that declares bankruptcy or defaults on debt. The common assumption in the media is that interest rates are higher on debt issued after a financial crisis than on debt issued prior to a crisis. By comparing municipalities that have been through a crisis to municipalities that have not, we see that interest rates begin to rise early and peak around the time of the crisis. Moreover, municipalities must provide information, certified by a third party, that their financial condition has improved before returning to the bond market. |
