Bankruptcy Can Happen To Anyone (Or Anything) - Even A City

Over the last few years, many cities across the United States have had to deal with smaller budgets and rising costs. Many have found ways to cut expenses, usually by passing the costs directly to its residents. Others, however, have not been so lucky. Examining the financial troubles of some cities or municipalities is a helpful reminder that money woes and potential bankruptcy are issues that affect everyone, from private cities and business even to organized governments.

For example, take the city of Detroit. The Michigan city’s downfall has been highlighted over the years due to many factors, the most of important of which is its ties to the auto industry. As the auto industry has fallen and reorganized itself, with help from the government, to survive, many have wondered about the fate of Detroit.

Right now, Detroit is doing its best to stave off bankruptcy, however, if its plan succeeds it will be to the detriment of many, including retired city workers. Detroit’s current plan, according to a Bloomberg article, is similar to what could happen in a private bankruptcy plan. It is trying to pay creditors a small portion of the actual debt owed and have the rest forgiven. If debt holders accept this proposition, this will allow Detroit to start fresh and create a new budget focusing on current and future issues instead of past debt. Creditors are not required to take this deal, and if they choose not to, then the next likely step would be court. While there is a possibility that creditors could get more than is being offered, there is no guarantee. This means it could be beneficial for both sides if they could find a mutual meeting point. This same principle applies in many negotiations between private individuals and those to whom they owe money.

However, there are some ways in which government debt problems are far more complicated than those facing individuals.

For example, according to a Crain’s Business article, one of the creditors Detroit is trying to underpay is retired state employees. Detroit’s plan is to cut pension benefits along with other debts, but it has not disclosed its suggested payment amount. Some claim a negotiation would be in the best interest for the unions and retirees but find it difficult to believe that they may be willing to settle. Retirees believe that the Michigan constitution protects vested pension benefits so in many of their minds, settling seems unreasonable. City officials, however, disagree and believe that pension holders may be treated like any other unsecured creditor. If city officials are correct, if the city goes into bankruptcy, retirees most likely will get far less than they are owed. There is also the issue of whether bond obligations and debt owed to vendors has more protection than pension claims. Depending on where pension holders fall, they could receive nothing at all.

While it is rare for a city to go bankrupt, it happens to individuals and businesses everyday. If you have lost income, have had a change in income, or think that it could be a possibility, meeting with an attorney may help. An attorney can let you know about options available to you and your family so you can navigate potential issues and handle the situation the best way possible for you. If you have had a change of circumstance or foresee one occurring in the near future, please contact our office for advice.