Bankruptcy and Detroit

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Bankruptcy is a procedure under federal law that is designed to help individuals and/or organization deal with their debts and get protection from creditors. The Bankruptcy laws were established to provide individuals and organizations with a fresh start. Filing for Bankruptcy will allow an individual or organization to get rid of most, if not all of their debts and keep most, if not all of their property. An individual or organization will usually file for Bankruptcy to receive a discharge (a court order that wipes out all or most debts).

Once a Bankruptcy case is filed an “Automatic Stay” comes into effect. This is an order from the court preventing creditors from harassing the individual or organization about the debt. A creditor cannot take any further action against the debtor without permission from the Bankruptcy court. This means that creditor actions such as: foreclosures, repossessions, utility shutoffs, evictions and debt collections will immediately stop upon the filing of the Bankruptcy petition.

There are different type of Bankruptcy filings. The most common are Chapter 7 and Chapter 13 Bankruptcy. There are six types of bankruptcies under the “Bankruptcy Code.”

  • Chapter 7: Basic liquidation for individuals and businesses; also known as straight Bankruptcy. This is is the simplest and quickest form of Bankruptcy available.
  • Chapter 9: Municipal Bankruptcy; a federal mechanism for the resolution of municipal debts
  • Chapter 11: Rehabilitation or reorganization. It is used primary by business debtors but sometimes by individuals with substantial debts and assets. This is known as “Corporate Bankruptcy” and allows companies to continue to function while they follow debt repayment plans
  • Chapter 12: Rehabilitation for family farmers and fishermen
  • Chapter 13: Rehabilitation with a payment plan for individuals with a regular source of income. This enables the individual to plan for  repayment.
  • Chapter 15: Ancillary and other international cases. This provides a mechanism for dealing with Bankruptcy debtors and helps foreign debtors to clear debts.

Detroit, Michigan became the most populous city to file for Chapter 9 Bankruptcy on Thursday, because their debt was approximately $18 Billion.  This amounts to the largest municipal bankruptcy filing in American history (in terms of debt). Detroit is home to 700,000 people and in 1950 the city once had a population of 1.8 million. With the arrival of the automobile industry the city rose to new heights and later fell to new lows, with now being home to tens of thousands of abandoned buildings and vacant lots. Detroit will now join a group of just over 60 cities, towns, villages and counties which have filed for Bankruptcy.

Detroit’s Bankruptcy process could take months, if not years and it is itself to be costly and complex. The reason is because of their lack of record keeping and overwhelming health care and pension costs. The municipal bond market will be paying particular attention to Detroit in the coming months. A lot of money has been invested in this and investors don’t like to lose.

“While leaders on the ground in Michigan and the city’s creditors understand that they must find a solution to Detroit’s serious financial challenge, we remain committed to continuing our strong partnership with Detroit as it works to recover and revitalize and maintain its status as one of America’s great cities.” Amy Brundage (@Brundage44), a White House spokeswoman.

Other large municipal Bankruptcies in the US:
Stockton, California         2012     $1 Billion in Debt
San Bernadino, California     2012     $492 Million in Debt
Jefferson County, Alabama     2011     $4 Billion in Debt
Orange County, California     1994     $2 Billion in Debt

Oh yeah, another interesting thing about Detroit’s Bankruptcy filings is that it violates the State’s Constitution. We’ll see how this plays out.

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