How can municipal bankruptcy get personal?

There are a lot of high-profile bankruptcy stories making the media rounds these days. Here in Texas, there’s the effort by American Airlines Inc. and its parent AMR Corp. to not only reorganize, but merge with US Airways Group Inc. as part of an overall restructuring through Chapter 11.

But the bigger story is the one involving Detroit and its efforts to go through Chapter 9 bankruptcy. A trial is currently underway to determine whether the city meets the legal standard of insolvency to press ahead with what will be the largest municipal bankruptcy in the nation’s history to relieve a debt burden estimated at some $18 billion.

What readers may not appreciate is just how much of an effect a municipal bankruptcy can have on individuals. The impact tends to be widespread, which is why it is no surprise that so many voices, including those representing Detroit city workers, oppose the city’s petition.

By way of background, Chapter 9 filings by governments are similar to Chapter 13 bankruptcy filings by individuals. The main goal is to afford a city protection while it restructures its debt. As in Chapter 13 and Chapter 7, Chapter 9 imposes an automatic stay on creditors’ collection efforts.

A ripple effect tends to be felt by virtue of how the bankrupt entity goes about its restructuring. Assets, such as parks or buildings, can’t be ordered sold off to pay debt. Rather, the restructuring is often done by the city rewriting terms of labor contracts almost unilaterally. City creditors also can’t suggest alternative plans.

In Detroit’s case, officials propose shifting from a pension system to a 401(k) retirement structure for city workers as a major means of achieving debt relief. Healthcare benefits are said to be on the chopping block, too.

In response, attorneys for unionized workers claim the city never really tried to negotiate contract changes in good faith to avoid bankruptcy, so they say the current filing should be rejected.

Not only does a Detroit bankruptcy threaten to drive many city workers into financial distress, but various businesses that depend on city contracts could suffer, as well. Even neighboring municipalities may be tarnished such that it diminishes their revenue generating abilities.

All that being the case, it’s no wonder that the Detroit situation is being watched so closely.

Source: FoxNews.com, “Detroit bankruptcy trial begins Wednesday,” Associated Press, Oct. 23, 2013

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