Over the last couple of decades, more people than ever have become familiar with bankruptcy. Some because they know a friend or family member who has had to seek relief through bankruptcy, others because they have had to file for bankruptcy themselves.
Bankruptcy exists not only for people but also for businesses and city governments. In the case of a city government filing for bankruptcy, Detroit, Michigan was one of the first large cities to take advantage of bankruptcy back in 2013. The city was $18.5 billion in debt, and the income base of taxes and the sale of bonds was not enough to cover their general operating expenses.
Detroit filed for a Chapter 9 bankruptcy. In this case, the city first has to be insolvent. This means unable to pay their bills on time. When the city files a Chapter 9 bankruptcy, it automatically triggers the automatic stay. This is a feature that provides temporary relief from making payments.
When a city files for bankruptcy, they have two options: a Chapter 9 or a Chapter 13. Both are similar where the debt is reconfigured and reduced payments are set. The city then needs to create a payment plan and stick to it. As they make their payment plan, they are allowed to make changes to contracts and agreements with public employees. They are also allowed to increase taxes and search for other ways to decrease their operating expenses.
The Aftermath
When a city files for a Chapter 9, the public employees are in danger of losing personal pensions and health care benefits. There may even be layoffs. The city, in efforts to reduce its expenses, may choose to not hire replacement employees. In many cases, this makes the job of the remaining employees more difficult as they are short staffed.
In cases of firefighters and police departments, this can place remaining employees in dangerous positions. ultimately leading to an increase in violent crime as police presence decreases.
The decisions Detroit made in efforts to reduce its debt has had extremely negative consequences. As crime increased dramatically, citizens became scared to live in their neighborhoods.
Businesses were victimized since their work force moved away, which forced many to relocate or shut down. Often, the remainder of their employees were laid off. In each of these cases, the city loses; for every citizen and business that leaves, the city loses its tax base.
Be Informed
As we can see with Detroit, filing for a Chapter 9 can literally destroy communities and even the city itself. Chances are, you won’t be personally affected by such an event, but it is important to be aware of the consequences if your city files for bankruptcy and to be as informed as possible.
Not many people have a career where they are able to help transform peoples’ lives. For years, I have been able to help people reclaim their financial freedom through bankruptcy.