State Bankruptcies May Be Legal If System Structured Correctly

Allowing states to declare bankruptcy could be constitutional if Congress avoids infringing on state sovereignty and relies on court oversight rather than an outside board.

It wouldn’t be difficult to create a bankruptcy system for “a sovereign state essentially consenting to the jurisdiction of a specialized federal court,” said John J. Rapisardi, chair of O’Melveny & Myers’ global restructuring practice.

There is some debate whether Congress could simply expand existing bankruptcy code provisions that allow municipal bankruptcies, practitioners and scholars told Bloomberg Law.

Doing so could run afoul of states’ sovereign rights, as well as Constitutional protections for contract rights, ...