Over the course of time, I have helped numerous people file bankruptcy and regain their financial freedom. One of the ways I help others is by encouraging them to learn more about their options related to debt and how to manage their money.
In 2013, Detroit, Michigan filed Chapter 9 bankruptcy because their income through taxes and the sale of bonds was not enough to maintain their operating expenses and cover the payments on their estimated $18.5 billion in debt. Chapter 9 bankruptcy was designed for cities and municipalities that find themselves in this type of situation. Detroit reached the place where they were insolvent, or simply were unable to pay their bills when they were due. When they filed bankruptcy, it triggered the automatic stay, similar to a personal bankruptcy where they no longer had to make payments to their debtors for a short time period. This gave the city time to make a new payment plan for their debt and to change agreements with city employees, as well as raise taxes. They also had a little time to review their operating expenses and look for ways to decrease those expenses.
Effects on the Community
Some of the decisions that Detroit made were to decrease the number of their city employees, including police officers, through layoffs and hiring freezes. The result of that decision can be seen on the news most nights, with an increase in many types of crimes. When a city files Chapter 9, not only do the public employees suffer through cut pensions, health care, and possibly even getting laid off, the community suffers when crime rises because of the lack of police officers, and the officers’ jobs also become more dangerous. The result can be a city that no longer feels safe, so the people start to move away. Businesses that rely on government contracts may be forced to relocate as well. The best efforts of the city to get its debt under control can also be the cause of the city suffering.
Fortunately, cities filing for a Chapter 9 are a rare occurrence. The impact on the community can be devastating, but there are examples of revitalization in cities such as Detroit. Most likely you will never have to worry about a city filing Chapter 9 and having it affect you by disrupting your retirement or even career. But it is good to be informed and to know how our government deals with debt and the affect it can have on everyone in that community.