…Could Bankruptcy Lie Ahead?
DETROIT (AP) — The first report by Detroit’s emergency manager declares that the city is broke and at risk of running completely out of money — a financial meltdown that could mean no paychecks for workers, no pension benefits and even deeper cuts in services.
If the city cannot avert disaster, the only remaining option appears to be bankruptcy, a threat that looms large over Kevyn Orr’s urgent efforts to make deals with creditors and debt holders.
The 41-page report was filed with the state Treasurer’s office Monday and shows a city flirting with insolvency.
Detroit area turnaround expert James McTevia says Orr may choose to go before a bankruptcy judge “when he gets his back against the wall and he can’t meet payroll and he has to have court protection.”
Detroit is not the only city that has gotten into financial troubles. In 2008 Maywood, Calif. became the first U.S. city to lay off its entire workforce and outsource all of its municipal jobs.
Maywood outsourced itself because it was unable to buy insurance due to a history of lawsuits and a big budget deficit.
Unlike an individual, filing bankruptcy for a city is a tough proposition. A city is a very complicated financial entity.
The most recent city to actually file bankruptcy, Chapter 9, is Vallejo, California which filed in 2008 and has yet to come out of bankruptcy. But California is an example of how not to run an economy. With a large state government and unsustainable social programs, California has more debt than they can service. In my opinion it’s just a matter of time before we see the first state file for bankruptcy protection unless drastic changes are made.
Back to Detroit, if they happen to file Chapter 9 it would allow them to remain in charge of its affairs, and do things like reject labor agreements and defer payment obligations, all while it works on a plan of reorganization.
The big question is how would a city going bankrupt affect us, the normal citizens? Supposedly not much would change or not much that would directly affect us. The grass in public place would get cut less, public libraries would likely close, public safety shifts may be reduced but there would never be the absence of total coverage.
One of the most popular misconceptions about cities in bankruptcy, as well as people and businesses for that matter, is that bankruptcy is a way of avoiding payment on all debts. When a city files for bankruptcy protection, it is still obligated to its debtors.
When a city files for bankruptcy protection, it mostly helps them make a plan to pay its debtors. When a city has a lot of past due debts, a bankruptcy filing would prevent lawsuits from each individual debtor.
When a city, or a person for that matter, files for bankruptcy, one of the main issues is figuring out the priority of the creditors. Priority is important because it can be the defining factor for when and how much a creditor gets paid.
So what can cause a city to go bankrupt? If a city lacks a properly balanced budget and goes around spending money like there’s no tomorrow, it can get itself in over its head with debt.
When the economy is down, the city takes in fewer tax dollars so their revenue is down. When you couple this with all of the obligations to state employees and service workers, not to mention pension obligations, it’s pretty easy to see how a city can end up in a financial mess.
You know if you find yourself in a tight spot like Detroit, with debt overwhelming you, there is an option that you have available that a city doesn’t. That option is to seek the advice of a professional that will help you get out from under your sinking debt and get you back on track to financial stability, all without filing for bankruptcy.
The professionals at DebtHelper.com can explain the benefits of a debt management program and provide you with a fresh start.
One of the biggest long-term benefits of the debt management plan is the reduction in interest. Reduced interest allows you to pay off your principal balances faster while saving you possibly thousands of dollars in finance charges.
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