How To Protect Yourself If Your City Goes Bankrupt.
It’s one thing to worry about your best supplier or customer going bankrupt. With Detroit filing for the largest municipal bankruptcy ever, things have just gotten riskier for entrepreneurs.
Bankruptcy laws exist for good reason—three, in fact. They provide an orderly way for filers to acknowledge they can’t pay everything they owe, they provide creditors with the best chance of getting at least some of their money back, and they help provide closure to everyone involved.
Stricter isn’t necessarily better, however: Countries with far more stringent bankruptcy laws than the U.S. tend to have lower rates of entrepreneurship and innovation. But just because it provides us some societal benefits doesn’t mean there isn’t a great deal of pain associated with declaring bankruptcy in the United States. And that pain is about to become far worse.
That’s because bankruptcy isn’t just an option for individuals or companies that declare it under Chapter 7, 11 or 13. Since the 1930s, our laws have also offered the option of Chapter 9 bankruptcy, which is the section of the bankruptcy code that allows municipal governments to file for bankruptcy. Every state except Georgia legally permits their municipalities to take advantage of the U.S. bankruptcy code should they need it. And in July, the latest municipality—the city of Detroit—announced it was insolvent and filed for bankruptcy under Chapter 9. With nearly $20 billion in liabilities owed to more than 100,000 creditors, it is the largest municipal bankruptcy in U.S. history.
How It Works and why You should Protect Yourself If Your City Goes Bankrupt
Since the municipal bankruptcy laws were written nearly 80 years ago, there have been nearly 650 filings, with the last few years accounting for several dozen of them. A municipal bankruptcy differs in many respects from an individual or corporate one. Although it’s a legal process handled by the courts, the judge presiding over the case doesn’t have as much flexibility or control as in other, non-Chapter 9 bankruptcy cases. In effect, the filing municipality is still in charge of the process of negotiating with creditors and presents its plan for achieving solvency to the judge for approval. This greater control also means that the municipality has greater leverage over its creditors.
