States Allowed to File Bankruptcy, Could be a Reality Soon

Yes, you read that headline correctly the first time. According to a report by Reuters, legislation is expected to be introduced to Congress within the next month - that would allowed U.S. States to file bankruptcy. Newt Gingrich, the former speaker of the House of Representative broke his silence to Reuters on Friday, January 21, 2011.

According to Gingrich there is support both in the House and Senate, and lawmakers have been examining this possibility for almost three or months. It is expected that the proposed legislation will face some resistence with Democrats still in control of the Senate and White House. According to the Retuters report,

Because states are sovereign, they cannot declare bankruptcy as cities can, and most have provisions in their constitutions that make defaulting on debt next to impossible.

Some states have already said, "No Thanks" - California, New York and Illinois announced Friday that they have interest in using bankruptcy to solve their fiscal problems. According to Reuters,

California is struggling to close a $25 billion budget gap, California already holds Moody's Investors Service's lowest state credit rating -- a distinction it shares with Illinois.

Despite teh recession ending in mid-2009, many states' economies are still fragile with revenue well below the levels reached before the recession and high unemployment rates making a bad situation, worse.

Many lawmakers from both parties are concerned Congress may have to step in again with an expensive fix and feel that the new legisltation of allowing states to file for bankruptcy would allow them to renege on their pension promises and other obligations to state employees.

"The very fact of the bill existing... allows governors to sit down with unions and say: 'Look you, negotiate with us or I'm taking the state into bankruptcy,'" Gingrich said.

We will continue to keep you posted as this story advances in coming weeks, to read the entire story at Reuters, visit their site.

Posted in bankruptcy , Budget Gap , California Bankruptcy , Illinois Bankruptcy , Newt Gingrich , Senate , State Bankruptcy