In June, Puerto Rico’s $72 billion debt crisis entered the financial news. For Puerto Rico, the search for a solution has shown just how limited their options are when it comes to handling problems with debt. Many have suggested that the Commonwealth needs to file for bankruptcy, but there are some issues and obstacles that make this idea a little problematic.
The first issue is that Puerto Rico cannot file for bankruptcy. For states and US territories, there simply is no code that allows for bankruptcy – with states being excluded on constitutional grounds. Therefore, with the current legal remedies that are available, Puerto Rico does not have the option to restructure its debt.
An additional problem for Puerto Rico is that Chapter 9 bankruptcy does not apply to US territories. With chapter 9, a municipality can seek restructuring. The problem here is that the code is specific in that it says that the municipalities of states can seek this relief. With Puerto Rico being a territory, it means that the code does not apply to their situation.
That being said, Congress could extend this protection to Puerto Rico if there were enough support. A bill to extend chapter 9 to US territories is unlikely to pass Congress and even if it did, it would only solve a portion of the problem. It could allow for the restructuring of debt for things like cities and public utilities that are in financial crisis, but the majority of the problem comes from public debt. Extending chapter 9 to Puerto Rico would help, but as a standalone measure, it would only delay the inevitable.
However, Puerto Rico’s status as a territory could provide one final option that the states do not have. The contracts clause in the Constitution prevents states from filing for bankruptcy, but as a territory, this constitutional argument does not apply. Congress not only has the authority to extend chapter 9 to a territory, but it also has the power to allow one to file for bankruptcy.
As it stands right now, Puerto Rico cannot declare bankruptcy and we have no clear answer as to how this debt crisis is going to be resolved. Congress is unlikely to act and there are very few options for the territory. As of the latest reporting, officials from Puerto Rico and the Treasury are in talks to find a solution.