Who Gets Paid and Who Gets the Shaft when an Entire City Files for Bankruptcy?

From time to time, any individual, business or organization could become so overwhelmed with debt they struggle desperately to simply remain afloat. Because more money is owed than they might possibly be able to generate, as well as their now having to borrow money to pay back borrowed money, the situation slowly spirals beyond their ability to manage any longer. Soon, the lack of incoming funds, the continuous influx of gradually increasing debt and their beginning to lose sources of credit once vital to their financial survival, the situation becomes too overwhelming. Their only chance to regain control of their finances, start the climb back up the fiscal hill and even more importantly, relieve the pressure being placed on them by creditors is to file bankruptcy.

Bankruptcy protection ensures all creditors cease the pressure being applied and the court assumes control, then begins to right the ship. The accounts, cash and eligible properties and assets are tallied and the debtors can apply to have their delinquent/outstanding debts paid from the money available. Unfortunately, there rarely ever is enough money and eligible assets to cover them all. This means some will be written off or exempt from issuing a claim. With individuals who filed bankruptcy, this could mean several thousands of dollars. In the event of businesses and organizations filing bankruptcy, it could be hundreds of thousands or even a million dollars’ worth of claims written off.

However, in the case of an entire city filing bankruptcy, it could be an almost astronomical amount of money. The city of Detroit, Michigan recently became the largest city to file for Chapter 9 Bankruptcy protection. Although other towns, counties and municipalities have filed for bankruptcy, Detroit is by far the largest, most renowned and most surprising to say the least. As of their filing in July 2013, Detroit’s debt and liabilities totaled an almost knee-buckling $18-$20 Billion Dollars! Prior to Detroit’s staggering filing, the closest town, county or municipality to file for bankruptcy was Jefferson County, Alabama who filed for a $4billion debt/liability bankruptcy protection.

After being granted Chapter 9 protection however, there were already over 100,000 creditors who had filed with the court to receive money owed to them by the City of Detroit. These numbers strongly suggest that quite a few of these 100,000 creditors will go unpaid. The powerful Detroit unions are all screaming this is merely the City’s way of trying to tip the balance of power and reduce union control. Yet the problem with Detroit goes much deeper than any intentional power tug-of-war with any unions. Detroit is broke. Period.

The city has over 70, 000 homes and properties which have long since been abandoned. Parts of the city look more like an area in Chernobyl than the powerful, industrial icon it once was. Although Detroit is the largest city to file for bankruptcy protection, it wouldn’t be surprising to see one equally or even larger, or one with more debt sooner or later. Detroit is simply the most notable of what is now becoming a growing trend of cities that can no longer keep operating as they have for eons.

  • Stockton, California
  • San Bernardino, California
  • Central Falls, Rhode Island
  • Jefferson County, Alabama
  • Detroit, Michigan

Those cities who filed but whose filings were dismissed include; Boise, Idaho/Harrisburg, Pennsylvania/Mammoth Lake, California. As the economy worsens, job availability diminishes and residents are forced to move, valuable tax dollars and census numbers responsible for some federal money moves along with them.