States Feel Financial Strain too, but can they Claim Bankruptcy?

States Feel Financial Strain too, but can they Claim Bankruptcy?

State governments are feeling the pressures of economic struggles too.

Financial stress has closely followed the spread of coronavirus. Closed businesses and rising unemployment numbers are evidence of the strain caused by COVID-19. States are also experiencing similar burdens, with budgets being stretched and expected income at a halt. Unlike businesses and individuals though, states cannot file for bankruptcy.

Who can Claim bankruptcy?

Both businesses and individuals can file for bankruptcy, and they may have different options depending on their financial situation. Less common, municipalities can also file for bankruptcy. According to an article by the Council of State Governments, with insight from law professor Kenneth Katkin, a municipality under bankruptcy code is a ‘political subdivision or public agency of instrumentality of a state.’ By this definition, cities and townships can file, but states cannot.

Under the U.S. Constitution, states cannot claim bankruptcy. Though the Supreme Court’s interpretation of the clause has evolved, it still does not allow it. The clause is interpreted to believe that by filing bankruptcy, a state would be refusing to meet its financial obligations.

States Experiencing Financial Distress

States are struggling during the pandemic as well. Just like individuals and businesses, there are still necessities to purchase, while the revenue coming in has been greatly reduced or stopped. State governments are requesting financial assistance from federal resources. Now under circumstances no one could have predicted, the conversation over states claiming bankruptcy has been reopened.

The National Conference of State Legislatures acknowledges the billions in funding from the federal government that is being distributed to states. These relief packages serve as aid to help states fight COVID-19. The funding is allocated both toward preventative measures and to address damages already caused.

Minnesota’s Financial Standing

At the beginning of 2020, Minnesota was optimistic about the strong potential for a budget surplus. An article from CBS Minnesota shared Governor Walz’s update on the state of Minnesota’s budget. Because the surplus was a prediction on now unavailable revenues, it quickly shrunk. With what was available now being spent on COVID-fighting efforts, the surplus is nearly spent.

The effects of this pandemic are without a doubt felt by all. Together, federal and state governments are looking to support American people through funding and aid. If you’re seeking financial relief for personal debts or your business, the bankruptcy experts at Hoglundlaw.com are also here to help.