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Municipal bankruptcy filings illuminate folly of stigma: Bankruptcy is tough--but it's a business decision

Taxpayers let Wall Street off the hook, but individuals have to act for themselves


Some bankruptcy basics

Chapter 7

Chapter 7 bankruptcy is often called "liquidation" bankruptcy because assets that can't be protected by state exemptions or federal exemptions will be liquidated (sold off) by the bankruptcy trustee. (Fifteen states plus Washington D.C. allow choosing between either state or federal exemptions; businesses that choose Chapter 7 receive no exemptions.) In many cases, the debtor has few or no assets over and above the exemptions, so there's nothing to sell.

Chapter 13

Chapter 13 bankruptcy is often called a "wage-earner plan" because the debtor has enough steady income to pay back (over three or five years) at least some of the total debt. Unlike Chapter 7, which is rarely used to protect a home with a mortgage, Chapter 13 is often able to prevent being forced into foreclosure. A debt cap exists in Chapter 13 filings: As of April 2010, the limit was increased about 7 per cent; the limit for a debtor's unsecured debt is $360,475 and $1,081,400 of secured debt. A debtor who owes more has to file Chapter 11, the Chapter commonly thought of as a business-only vehicle.

Chapter 11

Chapter 11 is also a "reorg plan," which can be quite versatile for individuals, but many business don't like it because the plan, in effect, brings in outside forces who have quite a say in how the business operates--including creditors. Nevertheless, for a going concern with legit re-org chances, Chapter 11 is much better for everyone involved than Chapter 7 would be.

Chapter 9

Another kind of bankruptcy is called Chapter 9, and it's made many a headline this year, most recently when Jefferson County, Alabama filed for Chapter 9 protection, the chapter in the bankruptcy code reserved for municipal entities (in this sense, municipal is not limited to a city or town but any governmental entity below state level; states can not file for bankruptcy protection).

Jefferson County 'biggest in US history'

A Nov. 9 article at Bloomberg.com says, "Jefferson County, Alabama, filed the biggest U.S. municipal bankruptcy after an agreement among elected officials and investors to refinance $3.1 billion in sewer bonds fell apart.

"The county, home to Birmingham, the state’s most-populous city, listed assets and debt of more than $1 billion in Chapter 9 papers filed today in U.S. Bankruptcy Court in Birmingham.

"The county’s bankruptcy attorney, Kenneth Klee, said the filing was necessary because talks with creditors and the receiver in charge of the sewer system built by the bonds broke down."

Harrisburg, Central Falls, Orange County

Other municipal bankruptcies this year include Harrisburg, PA ("debts of over $400 million that were largely tied to a trash incinerator project"), and Central Falls, RI, high-centered on pension debt. These bankruptcies are significant: first, the Jefferson County case is not only the largest-debt municipal bankruptcy but also it's so much larger than the previous record holder, Orange County, CA, which filed owing creditors a tidy $1.7 billion; second, cash-strapped cities and counties around the recession-plagued nation will be closely following these cases to see what kinds of deals they might get.

No shame, no stigma in business decision

Third, and most important for individual consumers, is the recognition and realization that bankruptcy no longer carries the stigma and shame it once did. If tycoons, auto companies and even cities and counties can ask for bankruptcy protection as a business decision, why can't individuals make a similar business decision without worrying about labels such as failure and deadbeat?

After all, we taxpayers bailed out the big banks who caused the financial crisis, in tandem with the lax government regulation that they bought via their lobbyists. Those same legion of banks own the credit-card companies, and they are the driving force behind such shoddy foreclosure practices that 14 of them have had to arrange settlement funds for people who lost their homes in 2009-2010.

'This is why people hate Wall Street'

As Matt Taibi writes, in a Nov. 10 Rolling Stone piece, "This is why people hate Wall Street. They hate it because the banks have made life for ordinary people a vicious tightrope act; you slip anywhere along the way, it's 10,000 feet down into a vat of razor blades that you can never climb out of."

And he's spot on about the emotional hell of that vicious tightrope scenario--but he's wrong about never having a way out. If you're up against the financial wall, you have to set emotion aside and realize that filing for the very powerful protection of bankruptcy may be the best business decision you've made in a long, long time.

Consider free case evaluation

We can help: If you’re interested in learning more about the power of bankruptcy protection, please, browse our site for more information; if you need help filing for bankruptcy protection for yourself, consider signing up for a free case evaluation.

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