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Municipal Bankruptcies Can Take a Toll On Personal Finances

A number of municipal bankruptcies over the last two years was recently punctuated by the high-profile filing of Detroit‚ the one-time auto capital of the world.

It unseated Stockton‚ California as the largest city to file for bankruptcy protection. Stockton‚ with a population 300‚000‚ cited some $1 billion in debt to creditors. Detroit meanwhile‚ with a population of 700‚000‚ cited some $18 billion in debt.

Our Los Angeles bankruptcy lawyers know that such actions can speak to the financial difficulties we face overall as a nation. But can they have any impact on individual finances?

The answer is that it depends. Generally‚ those here in Los Angeles may not be directly or significantly affected by what’s happening in Detroit. It’s possible if a California-based company had a lucrative interstate contract with the City of Detroit that‚ yes‚ they might be in for some headaches.

However‚ municipal bankruptcies will have a larger effect on those who live and work there. Even those who no longer work for the city but are retired and continue to collect a pension may face financial hardships as a result.

In Detroit‚ CNN Money reports that tens of thousands of current and retired city workers are facing a future with shrinking pensions. Those who are still employed are worried about the possibility that their jobs may be on the line.

In some cases‚ a federal program called the Pension Benefit Corp. will kick in to provide minimal benefits. However‚ certain workers such as firefighters‚ police officers and sanitation workers don’t have access to that safety net.

Whether these individuals should consider filing for a personal bankruptcy as a result of these losses‚ or a potential lay-off‚ is going to depend heavily on their individual circumstances.

In many cases‚ timing can be everything. Some of the reasons people might be wise to delay a personal bankruptcy include:

  • You have a chance to modify your mortgage. A lot of times‚ people will look to a bankruptcy in order to delay a foreclosure. This is often a good strategy. However‚ if you have a shot at a decent mortgage modification on your home‚ you might want to hold out on that. A bankruptcy filing will mean most lenders will refuse to enter into negotiations with you over your mortgage.
  • You have an income that’s recently been high. Generally‚ the court is going to look at your income over the last six months in determining your eligibility. If it’s high‚ the only option you might have is a Chapter 13‚ which is going to require you to repay a portion of your debts.
  • You anticipate new debts soon on the horizon. For the most part‚ bankruptcy is going to erase debts you had as of your filing date. Any new debts‚ you could well be deemed responsible.

The bottom line is that municipal bankruptcies can absolutely have an impact on individual finances‚ but the degree to which that happens varies. We don’t encourage anyone to rush any decisions when it comes to personal bankruptcy‚ but it’s often something worth considering.

If you are contemplating bankruptcy in Los Angeles‚ contact Cal West Law to schedule your free consultation. Call (800) 568-0707.

Additional Resources:
What if your city files for bankruptcy? July 19‚ 2013‚ By Michael Estrin‚ Bankrate.com

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