(215) 735-1060

Why Puerto Rico Had to Declare Their Own Form of Bankruptcy

Nov,16,2017

By:Mike Cibik

The U.S. Territory’s Struggles to Pay Off Creditors

 

There have been several times a city or municipality has declared bankruptcy because they ran out of money. Detroit, for example, declared bankruptcy in 2013 for 18 billion dollars. Bankruptcy was the only solution for the city. Why? Because there were many factors set up the city for it, such as:

  1. Rising pension costs;
  2. A crumbling infrastructure;
  3. Taxpayers leaving the city; and
  4. A credit downgrade for the city.

 

But what happens if you don’t have this solution? What if you had to find a “back door” to filing bankruptcy? This was the case for Governor Rosselló of Puerto Rico. Unfortunately, Hurricane Maria was the last straw for the island. The small U.S. territory was already having problems paying back creditors before Maria. Now that the island has been virtually destroyed, it would take a miracle for Puerto Rico to make a comeback in the next few decades. After all, New Orleans is still rebuilding after Hurricane Katrina.

 

What puts Puerto Rico in this tough spot is the fact that it cannot declare bankruptcy, like any U.S. city, because it is a territory. In 1984, Senator Strom Thurmond added an amendment to bankruptcy law excluding Puerto Rico from filing a Chapter 9 bankruptcy. By declaring a Chapter 9 bankruptcy, Puerto Rico could wipe out billions in municipal debt. A Chapter 9 bankruptcy is similar to a Chapter 11, where instead of the reorganization of a company, there is a reorganization of municipalities and cities. It also includes villages and taxing districts. It protects while creating a payment plan through negotiations with creditors. To add fuel to the fire, many creditors have sued Puerto Rico, trying to recoup the money they invested in bonds issued by its government. Unfortunately, they won’t get back much, if anything.

 

The Puerto Rican government has taken drastic measures in trying to find the money to pay off creditors by:

  • closing nearly 180 schools;
  • raising electricity and water rates; and
  • increasing sales tax to 11.5%.

 

Even with these measures, bankruptcy is the only option.

 

Creditors Loved Puerto Rico   

 

Creditors loved to invest in the island because there is a provision in its constitution that essentially says the government has to pay “general obligation debt services” before any other expenses. This guaranteed a return on their investments. Now, this provision doesn’t hold any weight since the government has defaulted several times on loans.

 

Using PROMESA Law to File Bankruptcy Protection

 

There is a way Puerto Rico could file bankruptcy – through PROMESA. PROMESA is the Puerto Rico Oversight, Management and Economic Stability Act. It was passed by Congress in June 2016. Under Title III of PROMESA Law, there is a court restructuring process. It would give Puerto Rico the ability to negotiate small payments with creditors. It is now up to a judge to determine how Puerto Rico’s debts will be restructured, much like the IRS setting up a payment plan for Chapter 13 filers. However, the judge does not have the power to seize any assets without authorization from the federal control board.

 

Governor Rosselló’s decision to ask for this form of bankruptcy came after creditors rejected proposed payments. The island owes $123 billion, the largest in the history of a U.S. state or territory. Recently, the House of Representatives recently voted in favor of the PROMESA Act. This gives Puerto Rico a fighting chance at recovery. With PROMESA, a judge can force creditors to accept a settlement.

 

With this form of bankruptcy, the $17 billion of sales tax-backed debt known COFINA debt will likely be pulled into the bankruptcy or will be put into a separate bankruptcy case. It will also freeze the numerous lawsuits against Puerto Rico.

 

Puerto Rico had no other choice than to use the PROMESA Act to bail themselves out. If they had statehood, then they could have declared a Chapter 9 bankruptcy a long time ago. Hopefully, the settlement will be one that Puerto Rican government can handle.

 

Bankruptcy Help in Philadelphia

 

At Cibik & Cataldo, we help people from all walks of life get a fresh financial start. No matter the scale of bankruptcy (Chapter 7, Chapter 9 or Chapter 13), we will help you get through your bankruptcy. We offer a free consultation to give you bankruptcy facts so you know what debts will be wiped, what the payment plan will be or how your company will be reorganized. There are no surprise fees. Contact us today at (215) 735-1060 to get out of your financial situation.

 

Search

Bankruptcy Law Awards/Associations

We are a debt relief agency that helps people
seek bankruptcy protection under federal law

Top