The recession hit many people in the United States hard, and few were left totally unscathed. Even though individuals may have emerged from the recession without having to file bankruptcy, several cities and municipalities did not fare so well. The upswing in cities declaring bankruptcy has left many individuals confused about what this means for them.
How Do Cities Become Bankrupt?
In many respects, cities are entities just like people, and cities function on the same economic principles as people do. While most of us are aware that the federal government operates on a deficit, very few understand that the same is true of many cities. Cities take out loans and make installment payments for a variety of public projects. When a city cannot pay its debts and officials cannot foresee a time when making all of the payments is possible, the city hires a bankruptcy lawyer to determine how to proceed. The bankruptcy lawyer then considers the details of the situation and makes a recommendation. In the past year, the recommendation of bankruptcy lawyers for many cities has been to open a bankruptcy case in federal court.
Bankruptcy for Municipalities
Federal bankruptcy laws for municipalities were first enacted in the 1930s as a response to the Great Depression. After the nation recovered, however, very few cities had a need to take advantage of these laws. In 2011, the number of cities filing for bankruptcy spiked due to the recession. In that year, 13 cities filed for bankruptcy, and several more have already filed in 2012.
Bankruptcy and the Economy
Bankruptcy lawyers agree that bankruptcy cases for municipalities had been isolated events for several decades. Today, the rash of municipal bankruptcies seems to be tied to the greater economy of the nation, which hasn’t happened since the first bankruptcy laws were enacted. The housing crisis played a large part in the filing increase, but decreased spending by the public also meant less tax revenue. In addition, investments that cities had relied upon for years began to fall apart. At the same time, long-term financial obligations, such as pensions for city employees, had also put a strain on the budgets of cities across the country.
Chapter 9 Bankruptcy
The type of bankruptcy filed by most cities is Chapter 9 bankruptcy, which is reserved only for municipalities. Chapter 9 bankruptcy is similar to Chapter 11 and Chapter 13 bankruptcy. It is a restructuring and refinancing plan that allows the debtor to pay debts through the court at a reduced rate.
In contrast to individuals, it is difficult for the federal bankruptcy court to force a city into compliance, especially when the city employs the top bankruptcy lawyers. In addition, creditors do not receive the same privileges that they would in an individual or business bankruptcy case. This means that cities receive terms that may be much more agreeable than those given in other types of bankruptcy. A Chapter 9 bankruptcy will typically result in the following consequences:
Cutback of Services
Most cities use bankruptcy as a time to modify their expenses. Oftentimes, cities cut back on public services, such as fire departments, sanitation and library funds.
The biggest expenses a city has are its public safety agencies, such as the police and fire departments. This should be an area of concern for residents. To make matters worse, many cities had already cut these services severely in the years leading up to filing their bankruptcy cases. However, waiting out this time instead of fleeing may have its advantages. Most cities learn how to become more efficient through bankruptcy, which allows them to offer more services at a lower cost after they emerge.
Higher Taxes
In addition to cutting expenses, many cities look at ways to increase revenue. The primary method of doing so is by raising taxes, but cities may also increase fines for code violations or make new investments. However, investment opportunities may be limited because lenders are not as apt to extend new loans to cities that have recently filed bankruptcy. In addition, many cities may not implement new taxes right away because residents will not want to pay higher taxes after services are cut.
Long-Term Effects
When a city files bankruptcy, it may experience one or more long-term effects. Eventually, taxes will have to be raised, and this will cause some unrest. In addition, most public projects are paid for through loans, and after filing bankruptcy, the rate given by lenders will be higher than it was previously.
Important Disclaimer: The information discussed above and throughout this website should not be relied upon to make any decisions without first speaking to a bankruptcy attorney. There are many intricate rules of law governing bankruptcy with many exceptions to the general rules that could change the advice given by an attorney based on the differing facts in each person’s special set of circumstances. THEREFORE, it is important to discuss any information contained in this website with one of our attorneys before taking any action or refraining from taking any action.
