Stockton, CA- The Stockton City Council convened on Tuesday
night to take a step that would make them the largest municipality to declare bankruptcy. The Council voted to stop paying creditors and municipal unions and
begin the mediation process.
California passed a law in 2011 that would make it harder
for a municipality to declare bankruptcy. The new law requires that a city
enter into a mediation process, led by a neutral party, with creditors and
public employee unions.
During the debate, Mayor Ann Johnston
said, “Right now we are city that has quite frankly hit a wall. We see no way out
of this except to begin this process.” The city is trying to prevent further
cuts to public services including the police force.
Experts in municipal financing have stated that this move
will not help the Stockton avoid future cuts to public services, based on the
city’s deficits. The city is facing a budget deficit between $20 million and
Stockton has faced budget shortfalls because of the housing
crisis and employee retirement health benefits. Retiree benefits are an issue
for many businesses that hire bankruptcy attorneys.
Under a Chapter 9, a
bankruptcy structure specifically for municipalities, Stockton will be able to
restructure their debts but not eliminate them entirely.
Some bankruptcy lawyers can suggest bankruptcy filings for individuals
and business that can reduce or eliminate some debt. When faced with
insolvency, there may be no other course of action for a troubled business or
individual, but to retain a bankruptcy attorney and chose a debt protection structure in line with their needs.