Supreme Court Dumps Puerto Rico's Seek of Chapter 9 Bankruptcy

By Staff Writer

Mar 23, 2016 03:04 AM EDT

The Supreme Court seems divided in opinion on Tuesday if Puerto Rico should be allowed restructuring their debts with its public utilities.  The debt-laden country requested the U.S. Supreme Court to authenticate a law that could slash billions of dollars from what it needs to pay in debt at some public agencies.  The U.S. territory owes creditors a total of $72 billion dollars.

Puerto Rico, a U.S. commonwealth is ruled out from Chapter 9, passed the Recovery Act in 2014.  It is a local restructuring law that enables it put public commodities like power authority PREPA, into bankruptcy.   Two U.S. court decisions considered the Recovery Act invalid after PREPA creditors filed lawsuit with the Supreme Court coinciding in December to hear an appeal, Fortune reports.

Chapter 9 bankruptcy is a proceeding the offers municipalities that suffers from money stagflation with protection from creditors.  That is by making a plan between the creditors and municipality to settle the outstanding debt. Included in the municipalities are townships, counties, school districts and cities.

The intention of Chapter 9 is to manage a repayment plan between municipality and creditors which can envelop the reduction of the outstanding debt or interest rate. This prolongs the term of the loan and refinancing debts, according to Investopedia.

The island tried to get around from being excluded by making its own version of a bankruptcy law, intended for its public utilities, accounting about $26 billion of the total debt.  However, only Congress can make bankruptcy laws, reports The New York Times.

"Why would Congress put Puerto Rico in this never-never land?" asked Justice Ruth Bader Ginsburg. "Why in the world? What explains Congress wanting to put Puerto Rico in this anomalous position of not being able to restructure its debt?"

Reinstating the Recovery Act will enable Puerto Rico to abandon the deal and rather put PREPA into bankruptcy where it could establish deeper cuts and bind holdout creditors to the deal.  In this way, the financially distressed country will be able to restructure its debts.

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