Monthly Archives: July 2011

Can a State, County, or City Government File for Bankruptcy?

By Ryan C. Wood, Attorney at Law

The answer is no, yes, and yes.  During recent budget sessions in the California assembly a representative suggested that the State of California should file bankruptcy.  It is not possible under the United States Constitution for a state to file for bankruptcy and discharge debts.  County governments and municipal governments are able to file for bankruptcy and reorganize their debts in Chapter 9 of the bankruptcy code.

What Government Entities May File for Bankruptcy?

Chapter 9 provides that municipalities may reorganize their debts.  The Bankruptcy Code defines a municipality as a “political subdivision or public agency or instrumentality of a State.”  Municipalities include cities, towns, villages, counties, taxing districts municipal utilities, water districts, school districts, bridge authorities, highway authorities and gas authorities.  Congress created this legislation during the Great Depression.  To date, the most famous municipality bankruptcy is Orange County, California.  The Bankruptcy Code has four other requirements: (1) the municipality must be specifically authorized to be a debtor by state law or by a governmental officer or organization empowered by State law to authorize the municipality to be a debtor; (2) the municipality must be insolvent, as defined in the Bankruptcy Code; (3) the municipality must desire to effect a plan to adjust its debts; and (4) the municipality must either: obtain the agreement of creditors holding at least a majority in amount of the claims of each class that the debtor intends to impair under a plan in a case under chapter 9, negotiate in good faith with creditors and fail to obtain the agreement of creditors holding at least a majority in amount of the claims of each class that the debtor intends to impair under a plan, be unable to negotiate with creditors because such negotiation is impracticable, or reasonably believe that a creditor may attempt to obtain a preference.  The Bankruptcy Code defines insolvency as a municipality generally not pay its debts as they become due unless such debts are the subject of a bona fide dispute, or unable to pay its debts as they become due.

Why Would a Municipality file for Bankruptcy?

So why would a municipality file for bankruptcy protection?  Like corporations or individuals the money coming in is not enough to pay ongoing expenses and service or pay for the existing debt of the municipality.  Why not just raise taxes?  How municipalities receive funding is very complicated and the ability to just raise taxes is very restricted to product us, the taxpayers.  The purpose of the municipal bankruptcy is to get rid of unfavorable financial arrangements such as unexpired leases, executory contracts and even restructure collective bargaining agreements and retiree benefit plans.  Many cities and counties are being squeezed by generous retirement packages for retirees, but can filing Chapter 9 reduce these expenses?

A problem with a municipality filing for Chapter 9 bankruptcy is that so few municipalities have done so.  There is not a lot of case law or decisions to know what can and cannot be accomplished when a municipality files Chapter 9.  In the recent bankruptcy filing of Vallejo, California, the City of Vallejo, according to court records, the city obtained a favorable ruling that California State law did not protect the contracts of city employees.  The City of Vallejo did not try to reduce retiree pension plans, a huge expense the City of Vallejo will struggle to pay for years to come.  Jefferson County, Alabama could be the largest municipal bankruptcy case if they choose to file in the next week or so.  Hopefully the economy will pick up enough so that many municipalities across the United States will realize increase revenues and prevent an epidemic of municipal bankruptcy filings.

For more information about municipal bankruptcy, Chapter 7 bankruptcy or Chapter 13 bankruptcy, contact our Fremont Bankruptcy Lawyers or San Mateo Bankruptcy Lawyers toll free at 1-877-963-9543.

What Happens if I Cannot Afford to Continue Making My Chapter 13 Plan Payments?

By Kitty J. Lin, Attorney at Law

Let’s face it – the economy is unstable.  If you’re one of the lucky few people that are 100% certain that your job is secure, then you are in the minority.  Most people don’t know if they will still have a job a month from now.  Therefore, it’s not surprising that even if you file a Chapter 13 bankruptcy case, that doesn’t mean your income will be the same throughout the term of your plan.  The basic concept behind the Chapter 13 “Wage Earner” bankruptcy plan is that, taking into account the income that you earn, minus all the allowable deductions, you have some money left over at the end of the month to pay your creditors.  To be considered a good faith filing you need to make sure that all your disposable income is being paid into the Chapter 13 plan. That may be easy to do in the beginning of your Chapter 13 bankruptcy term, but what happens when you receive a pay cut, or worse, lose your job?  Your expenses don’t decrease just because your income does.  Most expenses, like utilities, food and car insurance remain constant.  If there is a loss of income, you may not have sufficient funds each month for your Chapter 13 plan payment.  Therefore, what are some of the options that are available for you?

Converting Your Chapter 13 Bankruptcy into a Chapter 7 Bankruptcy Case

One of the first things to be determined is whether you would otherwise qualify for a Chapter 7 based on your current circumstances.  If you do qualify for a Chapter 7, then you can file a motion with the court to convert your case to a Chapter 7, and have your case be treated like it was a Chapter 7.   This means that you would receive a discharge of all your allowable unsecured debt within three to four months after the conversion to a Chapter 7, and then your case will be closed.

This option is good if you have no arrears for secured debt that you were paying through the Chapter 13 plan.  If there were arrears (for example, if you owed money to your first mortgage lender), then those arrears would need to be paid off.  If you cannot afford to pay back the remainder of the arrears, your collateral may be repossessed or foreclosed.

Essentially, all benefits that you enjoy in a Chapter 13 would no longer be applicable if your case is converted to Chapter 7, such as the lien stripping of a junior mortgage.  Even if the judge granted the motion to strip your junior mortgage, the lien is not taken off your property unless there is a successful completion of your Chapter 13 plan.  Converting your Chapter 13 case into a Chapter 7 case means that your Chapter 13 plan was not successfully completed, and therefore, no lien stripping.

Modifying Your Chapter 13 Plan

If you cannot qualify for a Chapter 7 or it is not in your best financial interest to convert to Chapter 7, the next option is to try to modify your Chapter 13 plan payments to a lower amount.  The judge may allow you to modify your Chapter 13 plan if you can show that there are changed circumstances which make it hard for you to continue making your plan payments.  The amount lowered depends on your specific case.  In some cases the Chapter 13 plan payments are already the lowest possible, and therefore a lower payment will not be feasible in the case.  If that were to occur, then the other possible option is to have your Chapter 13 case be dismissed.

Dismissal of Your Chapter 13 Case

Your Chapter 13 bankruptcy case may be dismissed either voluntarily or involuntarily (by the request of the trustee or creditors) due to non-payment.  If your case is dismissed, then your debts are not discharged, and you are back in the same position as before you filed your bankruptcy case.  Any amounts that were paid to creditors through the Chapter 13 plan will be credited towards your accounts with these creditors, but you will still owe the remaining balance.  If you were behind on your mortgage or car payments at the time the Chapter 13 case was filed, then your house may be foreclosed on and your car can be repossessed after dismissal and loss the protection from the bankruptcy court.

If you are facing some difficulties in your current Chapter 13 case, and you need to seek the advice of an experienced Fremont bankruptcy lawyer or San Jose bankruptcy lawyer, please contact us at 877-9NEW-LIFE or 877-963-9543 for a free consultation.