Puerto Rico looks like a perfect candidate for Chapter 9 Bankruptcy. Experiencing a prolonged, deep recession, flight of citizens to the mainland for jobs, the government of Puerto Rico has not been collecting enough taxes to meet its expenses. So like many governments in similar situations, Puerto Rico decided to borrow to cover its shortfall hoping the recession would end soon. This created a vicious cycle where the government of Puerto Rico borrowed ever increasing amounts to cover its budget shortfall and ever-increasing debt payments. Now, it cannot borrow anymore and will default
Unfortunately for their citizens, Puerto Rico is not eligible to file for bankruptcy. The U.S. Bankruptcy code allows for states, cities and towns and any subdivision, agency or “instrumentality” of a state to file Chapter 9 bankruptcy, not commonwealths. Since Puerto Rico does not fall into these categories, it cannot file bankruptcy to deal with its debts.
Moreover, without the treat of bankruptcy, it will be harder to negotiate with creditors, leaving the Commonwealth in a particularly difficult situation. Unless the law is changed, Puerto Rico will have a not be able to control its debts. In the end, it is the citizens of Puerto Rico, and the taxpayers of the United States, that will bear the burden.
For more information about the status of Puerto Rico's debt issues, check out these articles.
CNN Money: Puerto Rico Wants to Be Able to File Bankruptcy
Wall Street Journal Blog: US Bankruptcy Code Can't Help Puerto Rico
Or for the masochists...
,Chapter 9 of the Bankruptcy Code