Hounded by creditors and low on financial resources, Puerto Rico recently filed a Title III petition in federal court. This is apparently the first time that an American state or territory has sought this type of relief from a crushing debt load (in this instance, $74 billion to creditors and over $40 billion in pension liabilities).

On May 17, the U.S. District Court in Puerto Rico presided over its first hearing on the territory’s bankruptcy. This was officially the first case under the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA,) which was enacted by Congress last year. The new law, which combines elements of Chapter 9 and 11 bankruptcies, enables American territories to restructure their debts, a protection previously denied.

In the wake of this monumental filing, which was made by the territory’s federally appointed financial oversight and management board, people are left asking what exactly Title III is, as well as how it works.

Title III explained                                                                        

Title III is a court-ordered debt restructuring process similar to U.S. bankruptcy procedures. Named after Title III of PROMESA, this federal law was enacted by Congress to create the following rescue measures for Puerto Rico:

  • An oversight board
  • Debt restructuring process
  • Expedited means of approving important infrastructure projects

Because Puerto Rico could not file for Chapter 9 bankruptcy, which is usually reserved for insolvent municipalities in the U.S., Title III was the only feasible option for eliminating the island’s massive debt load. PROMESA has provisions for debt adjustment proceedings that follow a framework similar to Chapter 9 but is wider in scope.

How Title III works

When PROMESA was enacted, creditors were immediately prevented from collecting on the debts they were owed. No court order was required because the automatic stay was triggered by the PROMESA enactment, but the injunction can be enforced by court order if need be. Like a municipal bankruptcy, it protects Puerto Rico from the following debt collection actions:

  • Commencing or continuing collection lawsuits
  • Seizing property
  • Creating, perfecting, and enforcing most liens
  • Setting off debts owed to Puerto Rico against any liability claim owed to a creditor

Creditors do have the option of requesting relief from the automatic stay “for cause.” This motion may only be granted if the creditor can prove that if the stay remains in place, the resulting hardship will outweigh the hardship to Puerto Rico.

While some provisions and concepts of Title III may have been taken from the U.S. bankruptcy code, significant differences remain. Creditors who have dealt with Chapter 9 bankruptcy cases in the past are now confronted with a comparatively uncharted situation, and some situations may call for the courts to interpret and decide on their rights.

Jayson Lutzky is a personal bankruptcy lawyer with an office located in the Bronx, New York. If you are considering filing bankruptcy, then set up a free in-office initial consultation with Mr. Lutzky. He will explain the bankruptcy process to you and help you determine if it is the right option for you. To set up an appointment, call 718-514-6619 or visit www.MyNewYorkCityLawyer.com.