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In 1995, Washington, DC was in danger of bankruptcy but was recued when the White House and Congress established a financial control board for the city.
Chapter 9 bankruptcies designed for U.S. cities are not designed to extinguish excessive debts. Instead, their purpose is to aid in reorganization by allowing a city to break untenable contracts and obtain more attractive financing.
After a city declares bankruptcy, it will usually cut pensions for retired city employees, more layoffs, prisons will be turning to early release and police, highway patrols, firefighters, ambulances, sewer, water and other services will be impacted because of the layoffs.
The most serious problem for a bankrupted city is that it is hard to attract new investments and people would be scared to go to that city. Tourism will be greatly impacted because of the bad image.
While there have been U.S. cities going bankrupt, there is no U. S. state which has declared bankruptcy. However, according to a recent report by the New York Post, California Governor Arnold Schwarzenegger came to Washington earlier this year to get seven billion dollars for his state government, which resorted to paying off vendors with scrip and delaying state income-tax refunds. Illinois seems to be in even worse shape. A recent credit rating showed it weaker than Iceland and only slightly stronger than Iraq.
The paper reported that the prospect is that the bond market will quit financing California and Illinois long before the federal government. It may already be happening.