Did you know that even cities can declare bankruptcy? It is rare, but they can do it.
Let’s say you’re a city and you are staring at more money going out to run the city than is coming in. If that goes on for long enough, the word bankruptcy begins to appear on many people’s lips. The prospect of a city going bankrupt is mind boggling, but it can happen. Think Orange County, Calif., which declared bankruptcy in 1994. That was one of the largest municipal bankruptcies on record and virtually a precedent no one seemed to be anxious to follow.
Flash forward to 2011 and the current state of the economy. These days, just about everyone may flirt with and/or actually decide to file for bankruptcy. If there are no other options open, that is a move that makes the most sense to many. Does this work for cities and municipalities? Yes, it does. There is Chapter 9 for them, if their state allows that and 26 states do not allow cities and municipalities to go bankrupt.
Despite the fact that many states frown on cities and municipalities going under, this does not stop them from thinking about it and discussing it as an alternative to a desperate financial situation. In fact, just recently, it hit the news that Hamtramck, Mich. wanted to declare bankruptcy. Then the news surfaced that Central Falls, R.I. may be in the same boat. Harrisberg, Penn. is another “me too” candidate for bankruptcy. Things are indeed looking fairly grim.
Chapter 9, for those that can take it, is a desperate last move and one that may open the door for others in the same mess to move to do the same thing; a complete financial fiasco in the making. Those who do take that route have a long way to come back as well. Consider what those cities and towns would do to cope. What about town services? What about municipal bonds? What about driving up the costs of borrowing? What about the human fallout?
There is the very real scenario of city pensioners being cut off; something that has already happened in the city of Pritchard, Ala. when they declared bankruptcy not once, but twice in a 10-year period. The fallout is just beginning all over again for them. So, while Chapter 9 is an option for some cities and municipalities, the ramifications are horrendous. This is a move that should only be taken if there is absolutely no other way out from under debts.
Kevin Ahrenholz is an Iowa bankruptcy lawyer and Iowa bankruptcy attorney. To contact him, visit http://www.iowachapter7.com or call 1.877.888.1766.
