Friday, July 19, 2013

Bankruptcy Fundamentals & Detroit

All over the news today, "Detroit Files For Bankruptcy under Chapter 9!". According to the Washington Post, Detroit’s filing Thursday was the largest municipal bankruptcy in the nation’s history, marking a now all time low in a long & continuous 
decline that has left "Motown", the U.S. auto-making capital bleeding it's few remaining residents and revenue while rendering city services a mess. The city, in it's hey day was the nation’s fourth-largest (in the 1950's), with nearly 2 million residents, has seen its population dwindle to 700,00, as people fled rising crime, corrupt politicians and deteriorating services, taking their tax dollars with them.


What is Chapter 9 Bankruptcy?  It is a lesser known chapter of bankruptcy that is
specifically designed for "municipalities". Municipalities include cities, towns, counties, taxing districts, municipal utilities, and school districts. Chap.9 allows municipalities to reorganize their debt by:
  • extending the timeline on repaying debts,                        
  • debt refinancing,                                                        
  • or the reduction of principal or interest on existing debts.                         
The assets of a municipality are not liquidated under Chapter 9. 

A fundamental goal of the bankruptcy laws enacted by Congress is to give an honest 
debtor a financial “fresh start”. 

 the filing of either a voluntary petition in the United States Bankruptcy Court, or in certain cases an involuntary petition filed by creditors.   This filing creates the bankruptcy estate. The bankruptcy estate generally consists of all of the assets the individual or entity owns on the date the bankruptcy petition  was filed.
Pic Courtesy: Google Images
How can this be accomplished?                                                     This is done through the "bankruptcy discharge"which is a court ordered prohibition against the collection of certain debts as a personal liability of the debtor. Bankruptcy proceedings begin with:  
  • the filing of either a voluntary petition in the United States Bankruptcy Court,
  • or in certain cases an involuntary petition filed by creditors.  
  • This filing creates the bankruptcy estate. The bankruptcy estate generally consists of all of the assets the individual or entity owns on the date the bankruptcy petition was filed. 
If we remember not long ago similar doubts were cast when GM & Chrysler declared bankruptcy but we are still buying their cars. Hopefully restructuring it's debt will help Detroit reinvent itself & come back to it's glory days with help from Detroit companies like Quicken Loans, Blue Cross/Blue Sheild and General Motors.  
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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxsolutionsllc.com. 

Sources: Washington Post, Detroit Free Press, www.irs.gov, Forbes.