Subnational Government Bankruptcy, Defaul, and Fiscal Crisis in the United States

Like individuals and businesses, subnational governments sometimes face financial difficulties. Subnational government can get into financial problems in various ways, sometimes through economic or social misfortune; sometimes through incompetence or malevolence; sometimes through a stubborn unwillingness to make tough budgetary choices; and often through a combination of these causes. For creditors and citizens of those governments, the cause is less significant than the result -- unnecessarily high taxes or woefully inadequate government services or both. The standards for establishing bankruptcy of an economic entity (whether an individual, corporation, or another unit, such as a local government) differ from country to country. However, the concept generally means that the entity is unable to pay its debts as they come due or to pay its debts in full.1 Bankruptcy or insolvency law in many countries provides for the development of a plan that allows the debtor to resolve these debts through division of assets among the creditors in a way that treats the interests of the creditors with some measure of fairness. The intention is to protect the entity from its creditors so that the assets may be distributed equitably among the creditors and the debtor can be discharged from further liability. The idea is to provide “breathing room” so that the debtor has some opportunity to make things right and may continue to exist if at all possible. The protection is usually through a specialized court or administrative body. The fresh start that bankruptcy affords is presumed beneficial to both the debtor and the creditors. Of course, some entities are beyond hope and the process leads toward complete financial liquidation rather than rehabilitation.