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Stockton Chapter 9 Bankruptcy Approved Despite Objections

Posted on Tuesday, November 4th, 2014    

A judge has approved the exit plan for the bankruptcy filed by the City of Stockton, according to recent reports.

Judge Christopher Klein of the U.S. Bankruptcy Court for the Eastern District of California in Sacramento rejected arguments that the plan discriminated against certain creditors by refusing to pay a mutual fund while protecting city retirees from loss of funds. The city has included budget cuts and a sales tax increase in the plan, but does not affect city workers’ benefits now or in the future. The plan does eliminate retiree health benefits.

The judge noted that “significant concessions” had already been made on the part of Stockton employees and retirees, giving up at least $550 million in health care plan coverage. City worker future pay will also be reduced under the plan, which means smaller pensions in the future.

Chapter 9 Bankruptcy—Becoming More Popular?

In previous years it was rare to hear of cities or municipalities filing for protection under bankruptcy law, but since the housing bubble burst in 2009, many cities in California have had to seek this protection. Chapter 9 municipal bankruptcy gives the judge in the case almost no power to interfere with a city’s governing power, meaning that cities often have much more latitude in planning a bankruptcy than private enterprises or individuals. However, cities also have much more complicated relationships with creditors, including those that handle retirement and health benefits for employees. Additionally, cities often sell municipal bonds to investors that will be relatively worthless if the city files bankruptcy, so it is not unusual for creditors to fight vigorously to be treated fairly under the plan.

If the city attempts to treat some creditors differently than others, the situation may result in a “cramdown” in which the judge rejects the bankruptcy exit plan. In this case, Stockton was fortunate enough to secure approval for its plan despite creditor objections.

What Should I Do If I Am Facing Bankruptcy?

An individual or business facing bankruptcy may not have as complicated a relationship with creditors as a city, but many of the same issues may arise. Individuals and businesses are also required to treat creditors fairly, to report all assets and debts and to pay back as much as possible under their bankruptcy plans.

If you are facing bankruptcy, you need sound advice in order to understand your obligations. Contact Amerio Law Firm in Sacramento today to learn more about how bankruptcy may be able to protect you from your creditors.

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