Currently struggling with a $72 billion debt Puerto Rico, the US territory, has been approved to appear in the U.S. Supreme Court in a bid to restructure a portion of its large debt. The small island territory first began struggling back in 2006 when a recession hit. Over 9 years that recession has not let up, and the debt continued to pile on and is now 64% larger than it originally was. With the debt situation showing absolutely no signs of improving, Puerto Rico previously passed a law allowing the municipalities to restructure around $20 billion in debt, a practice that is applicable under Chapter 9 of the U.S. bankruptcy code. This decision, however, was struck down by the U.S. federal courts due to the fact that Puerto Rico, under U.S. bankruptcy code, does not have the ability to file Chapter 9 as the 50 states do.
The most prominent, and also largest, example of Chapter 9 bankruptcy being filed in the United States was when Detroit filed for bankruptcy and the restructuring of its municipalities, which cut $7 billion from its total debt of around $18 billion. This is a practice that Puerto Rico had hoped to follow after the passage of its law, especially since the passage of the Recovery Act in 2014.
Although Puerto Rico was excluded from filing Chapter 9 bankruptcy per the U.S. bankruptcy code, the Recovery Act, according to Puerto Rican officials, ended this exclusion and therefore made Puerto Rico eligible. The hearing in the Supreme Court will decide whether the Recovery Act is in conflict with the bankruptcy code and whether or not Puerto Rico is allowed to restructure its municipalities by June of 2016.
While the government of Puerto Rico is very much in favor of this restructuring, the creditors who hold bonds for their municipalities are extremely opposed (for understandable reasons). The government has already started issuing pay cuts to creditors and instituting other austerity measures as well. However, it is projected that these cuts, in addition to revenue increases, will only be able to resolve half of the predicted deficits of $28 billion in the next five years. The restructuring of municipalities would allow for some relief for Puerto Rico, but also leave creditors with drastic losses similar to the losses in Detroit. Furthermore, many politicians believe that allowing restructuring will set a dangerous precedent for other territories. This Supreme Court decision will likely have lasting implications throughout the foreseeable future.