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How to Bankrupt a State

posted by Jonathan Lipson

Clearly, Scott Walker, Wisconsin’s newly-elected Republican governor, did not get Newt Gingrich’s memo:  Walker has figured out how to bankrupt a state without any need to amend the Bankruptcy Code.

As discussed in my post last week, a curiosity of Republican proposals to amend the Bankruptcy Code to permit states to declare bankruptcy is that it probably won’t happen.  Even if a Democratic Senate and President approved a new "chapter 8" of the Bankruptcy Code, the Democratic governors of the most profligate debtor-states—California and Illinois—probably wouldn’t use it.

Walker has shown another reason a state bankruptcy amendment won’t become law:  It isn’t necessary. 

In just a few short months, Walker has allegedly given away hundreds of millions of dollars to wealthy donors, thereby driving up the state's deficit, creating a fiscal "crisis" that some claim didn't previously exist.  He cancelled the federally subsidized high-speed rail proposal, apparently costing the state over $800 million in federal funds, a significant number of jobs, and presumably some contract damages.  And, most important, he has decided to pay for this by unilaterally cutting middle-class wages for public employees, and eliminating their right to bargain collectively. 

Eliminating middle class jobs and breaking unions has certainly been the goal of some bankruptcies.  But if, as Walker has shown us, states can do that without bankruptcy, why bother to amend the statute? 

Maybe Newt should talk to Scott.

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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