Hafemeyer Law

Can a City File Bankruptcy?

The short answer is yes. The financial problems that have plagued many in middle income America also seem to be having an impact on many large cities across the country. Most recently, one of the largest cities in the United States, Detroit, Michigan, filed a petition for bankruptcy.

In most cases, creditors have a right to file objections to the discharge of a debt against them. It is these objections that Detroit is currently attempting to overcome. Oral arguments have been set in order for the court to determine whether the city is eligible for bankruptcy relief.

The rules are different for a city. When an individual or a corporation petitions the court for debt relief, they are typically granted a “stay” under the law. During this stay, and while the court determines whether or not the petitioner is eligible for a release of their eligible debts, they are protected from legal action from creditors. Unlike a corporation or an individual, a city must prove that they are eligible for the court’s protection from their creditors.

Raising tax dollars may not be the solution for a few reasons. Often times, retired city employees are one of the largest creditors a city may have to pay. Current collected tax dollars are typically not enough to support retired workers, because in many large cities retired workers outnumber employees 2 to 1. Also, it is difficult to convince current employees to pay
higher taxes to cover pensions for older workers who do not provide any services. So cities are often forced to cut city services to cover pensions.

There may be a solution on the horizon for some large cities. As amenities including artistic and cultural venues are making resurgences in many cities, baby boomers and retirees seem to be moving to large cities to take advantage of these types of amenities. This relocation of tax payers may be the catalyst that brings some cities into the black.

Comments are closed.