Bankruptcy and Detroit: How a Chapter 9 Bankruptcy Affects Consumers

22 Jul Bankruptcy and Detroit: How a Chapter 9 Bankruptcy Affects Consumers

In mid-July 2013, the media all over the United States broadcast the news that the city of Detroit, Michigan had filed for Chapter 9 bankruptcy protection.The United States bankruptcy code provides that even acity may file for bankruptcy protection under 11 U.S.C. 9. News commentators have been “buzzing” about what this bankruptcy means for the rest of the country. Unlike consumer bankruptcies which numbered in the millions in 2005, there have been fewer than 500 municipal bankruptcies filed since the 1930’s when the bankruptcy code was amended to allow municipalities to file bankruptcy under Chapter 9.

Section 109(c) of the Bankruptcy Codeoutlines four eligibilityrequirements for a municipality to file for chapter 9 bankruptcy protection:

11 U.S.C. 109(c) An entity may be a debtor under chapter 9 of this title if and only if such entity—

(1) is a municipality;
(2) is specifically authorized, in its capacity as a municipality or by name, to be a debtor under such chapter by State law, or by a governmental officer or organization empowered by State law to authorize such entity to be a debtor under such chapter;
(3) is insolvent;
(4) desires to effect a plan to adjust such debts; and
(5)

(A) has obtained the agreement of creditors holding at least a majority in amount of the claims of each class that such entity intends to impair under a plan in a case under such chapter;
(B) has negotiated in good faith with creditors and has failed to obtain the agreement of creditors holding at least a majority in amount of the claims of each class that such entity intends to impair under a plan in a case under such chapter;
(C) is unable to negotiate with creditors because such negotiation is impracticable; or
(D) reasonably believes that a creditor may attempt to obtain a transfer that is avoidable under section 547 of this title.
If you read the above and are still wondering how the Detroit bankruptcy will affect anyone, the main issues will be the following:
1. Whether Detroit is authorized under Michigan law or whether an official of Detroit’s city government has the power to file a bankruptcy.Detroit’s Emergency Manager Kevyn Orr filed the Chapter 9 bankruptcy which wasapproved by Michigan Gov. Rick Snyder. A Michigan state court judge has already ruled that the bankruptcy filing is an unconstitutional attempt totamper with government worker’spension benefits.
2. Whether the filing is in good faith or an attempt to stop a court action which prevented the city from being able toget rid of union contracts, pensions and whether the proposed plan filed by Orr to pay merely 17% of what the city owes is a reasonable plan of reorganization. Most experts predict a ripple effect on consumers as Detroit residents are impacted, followed by Michigan residents and then the economy. Orr’s reorganization plan providesthat $9.5 billion of Detroit’s $11.5 billion in unsecured debt be eliminated — in order to be able toprovide better services and to continue to pay its bills. However, most of that $9.5 billion is part of benefits associated with pensions and retirement, including health care benefits for retirees and is required by the current union contracts.
Detroit’s Chapter 9 bankruptcy will have a definite impact on consumers as the City will attempt to re-negotiate those pension benefits and health care benefits with other benefits being impacted as a result.
Related Posts Plugin for WordPress, Blogger...
The following two tabs change content below.
I'm a consumer protection lawyer in Oregon, working with people in Klamath; Lake; Jackson; Josephine; Curry; and Deschutes County. I speak regularly on bankruptcy and consumer protection issues nationwide.
No Comments

Sorry, the comment form is closed at this time.