The payment of Muni bonds in Chapter 9 bankruptcy depends upon the source of revenue pledged to the bond. General Revenue bonds have a full lien on future tax receipts. The payments may be postponed, but must be repaid. Recovery of other types of Muni bonds depend upon the value of the pledged revenue streams.
The following is interesting. Especially for folks at places like Fidelity who have their "core account" stuck into Munis.
publicbonds.org
Defaulted municipal bonds have a fairly high recovery rate of 68.33 percent based on the number of defaults
The borrower may get out of the default situation by making full debt service payments or collateral securing the bonds may be liquidated. Most issuers, particularly providers of essential services such as water and sewer, resume paying debt service.
These types of securities are backed by physical assets that are public property. Thus they are never pledged to bondholders. In such cases, bondholders maintain a lien on revenues, which often enables full recovery. Industrial development bonds and multifamily housing bonds, the two sectors with the highest default rates, are often backed by collateral leading to higher than average recovery rates.
In 1988, a study by Enhance Reinsurance Co. looked at historical patterns of municipal defaults from the 1800s to the 1980s and concluded that municipal defaults usually follow downswings in business cycles and are also more likely to occur in high growth areas that borrow heavily. Following the 1873 Depression, when more than 24 percent of the outstanding municipal debt was in default, the greatest number of defaults occurred in the South, the fastest-growing region at the time. Factors that caused defaults included fluctuating regional land values, commodity booms and busts, cost overruns and financial mismanagement, unrealistic projections of the future, and private-purpose borrowing.
see also uscourts.gov
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