The Good and Bad about Bankruptcy for States

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Last year, 1.5 million Americans filed for bankruptcy. Some cities and counties had also done so. But what about states? Constitutionally, states cannot file for bankruptcy protection because they are independent sovereigns according to the constitution and therefore cannot come under bankruptcy supervision of the federal government.

But now a few lawmakers are lobbying for states to have the right to file for bankruptcy with the reason that that would make it less likely for them to seek federal bailouts for their financial problems. Former House Speaker Newt Gingrich, one of the foremost advocates for state bankruptcy, said that bankruptcy would reduce the clout of labor unions. Patrick Gleason of the Americans for Tax Reform, another supporter of state bankruptcy, said unions would “face a much more dire outcome in bankruptcy court than they would if they renegotiated.”

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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