Municipal and Business Bankruptcies Similar in Some Respects

On October 28, 2013, a federal judge in Michigan heard arguments from creditor groups that the bankruptcy for the City of Detroit should be dismissed because the constitution for the State of Michigan prohibits a bankruptcy court from modifying benefit payments for pension holders and retirees. The case puts general bankruptcy rules against a special protection peculiar to that state’s constitution.

The case itself is filed under Chapter 9 of the United States bankruptcy code. This particular chapter applies to the bankruptcies of municipalities. While the City of Detroit is not the first municipality to file bankruptcy – even this year Stockton, California filed for such protection – it is the largest city to ever file. While the interests and the goals of cities and counties differ from those of private companies and nonprofit organizations, the basic concepts underlying bankruptcies for businesses and municipalities are quite similar.

In both instances, the corporation or the city have reached a point where their liabilities exceed their assets and their expected revenues will not allow usual operations without shedding much, if not all, of their liabilities. In Detroit, the city has lost much of its population and a good deal of its tax base. Its remaining population does not pay a large share of taxes, further depleting revenue. Meanwhile, the City owes a great deal of money to former and current city employees who earned pension benefits and can no longer afford to pay those benefits and continue to operate the city, a problem which has existed for several years. To make the equation work, the City needs to get an order, which among other things, reduces what must be paid out to city retirees as well as the other creditors.

While many bankruptcies involving private companies neither get the publicity nor have the kind of impact that this particular bankruptcy does, the basic concept is still the same: How to get rid of previous liabilities to either allow the company to continue operating or to ensure creditors receive some percentage of what they are owed, or both.

In Albuquerque, Giddens & Gatton Law, P.C. has attorneys who offer expert handling of Chapter 7, Chapter 11, Chapter 12 and Chapter 13 bankruptcy cases. The firm represents many debtors and creditors in Albuquerque, Santa Fe, Taos, Raton, Farmington, Gallup, Grants, Roswell, Los Lunas, Placitas, Belen and the rest of New Mexico. Contact Giddens & Gatton Law, P.C. at (505) 633-6298 to set up an appointment or visit the firm’s website at Giddens & Gatton Law, P.C. is located at 10400 Academy Road N.E., Suite 350 in Albuquerque, New Mexico.