Can a State Declare Bankruptcy?
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.