If a state was allowed to go bankrupt, it can become constitutional if there is no infringement on the sovereignty of the state.and the courts are relied upon as oversight. In fact, it would be a simple task to have a system in place for state bankruptcy when the state consents to a federal court having jurisdiction.
If a provision existed for state bankruptcy, it would likely cause challenges to arise, however, the lawmakers would be the more immediate challenge. There may not be much enthusiasm from Congress, especially when a federal bailout would likely be the alternative to a bankruptcy.
The Sovereignty of the State
While many state counties and cities can easily obtain authorization for bankruptcy, a state is quite different. This difference is due to the sovereign rights and their protected immunity they obtain from the Constitution’s 10th and 11th amendment. With these protections in place, the state is unable to be placed in bankruptcy on an involuntary basis.
However, if a law was developed that governed voluntary bankruptcy, it could be viewed as a Chapter 9 bankruptcy. With a bankruptcy law governing state bankruptcy in place it would need to contain similar verbiage as other bankruptcy laws in order for it to be held as constitutional.
Upholding the Contracts Clause
Besides being sovereign states, there will need to be a method of where the state does not violate the Constitution’s contracts clause. Under the clause, the states are banned from impeding upon contracts that are private in nature. Although the proceedings of a bankruptcy permit the altering a contract or canceling it altogether.
Regardless, Congress may be seen as aiding and abetting the states to pass laws that may settle the contract. This is what could happen if a law was passed that authorizes states to file for bankruptcy.
This argument is what turned up during the Great Depression as many municipalities got rejected for bankruptcy through the Supreme Court but later accepted.
It was later noted in 1936, that a state was sovereign and held by the Constitution’s contract’s clause so bankruptcy would be impossible. It was then that New Deal Legislation was being upheld and not stricken.
There is a counterargument to all of this involving the prohibited altering of contracts. When a bankruptcy law is developed, it would be a federal law and not have any implication on the ban.
It can be difficult to determine if a state would need to obtain bankruptcy protection when they already have constitutional amendments. Plus, there is no recourse for creditors when default is made by the state. If you are in need of more information, get a hold of us today.