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Can a State Declare Bankruptcy?

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I ran across an interesting article today over at Slate.com, the title of which asks whether California could declare bankruptcy.

On a daily basis I try to explain to people that a bankruptcy discharge is really just a permanent injunction issued by a federal court preventing a creditor from suing you on an unpaid debt.  With that concept in mind, I try to dissuade people from jumping into a bankruptcy simply because they have missed some debt payments.  If that creditor wants to do all the bad things people are afraid of — garnishment, execution, etc. — they need to first bring a lawsuit and obtain a judgment.

Along those lines, the article answers the question in the negative.  Of course a state like California or Arizona can’t file bankruptcy, but even asking the question shows a misunderstanding of what bankruptcy is.  A state has immunity from suit pursuant to the 11th Amendment to the Constitution (remember that little thing called Sovereign Immunity?), so a bankruptcy discharge/injunction is unnecessary.  That being said, municipalities can file for bankruptcy protection and the federal government has other options for a “bankrupt” state such as appointing a receiver.

Take a look at the article and let’s all hope the question is merely rhetorical.

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Hamid Jabbar

Hamid Jabbar

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