City of Stockton Files for Bankruptcy

The city of Stockton has filed for bankruptcy. A municipality such as the city of Stockton can file for bankruptcy utilizing Chapter 9 of the Bankruptcy Code.

Consumers who have filed for bankruptcy may not be familiar with a Chapter 9 bankruptcy. A Chapter 9 bankruptcy can only be used by municipalities, such as the city of Stockton, when its liabilities exceed its assets/income. This is something that even the most basic bankruptcy filer can understand because, after all, the reason people file for bankruptcy is they don't have enough income to pay their obligations. Consumers will be familiar with several other chapters of bankruptcy: Chapter 7 (liquidation bankruptcy), Chapter 13 or Chapter 11 (reorganization or repayment bankruptcy).

While in many ways Chapter 9 bankruptcy is similar to the more familiar chapters — 7, 13 and 11 — Chapter 9 bankruptcy has a number of unique characteristics. For example, the ability of cities and other municipalities to rewrite collective bargaining agreements which were made back in less cash-strapped days is much easier under Chapter 9 bankruptcy. Chapter 9 bankruptcy may allow the city of Stockton to rewrite the agreements reached with current and retired employees regarding pay scales, retirement packages, health benefits, etc. This may be allowed by the bankruptcy court even though there are state laws which prohibit this. In the city of Stockton's situation this benefit of Chapter 9 bankruptcy would seem to be one of the primary reasons for filing bankruptcy. Currently, due to the housing bust and the downturn of the economy, the city of Stockton cannot pay its debts. The city has been laying off police, fire and other personnel in an effort to meet its obligations. However, since it doesn't appear the city made enough progress in balancing its budget, Chapter 9 bankruptcy seemed to be its only option.

A similar bankruptcy occurred in 1994 when Orange County, California, filed for bankruptcy relief. At that time it was the largest municipality to file for bankruptcy. Orange County faced generally similar problems in that their liabilities exceeded their income. The Orange County bankruptcy is considered one of the most famous bankruptcy cases in history. The city of Stockton, in filing for bankruptcy, has joined the likes of Orange County as one of the most famous bankruptcy cases. In 2011 there were 13 bankruptcy filings by municipalities, which is a relatively low number of bankruptcy filings considering there are approximately 89,500 local governments, counties and other municipalities in the U.S.

Only six years ago, Stockton had appeared as a boomtown as median home prices shot up from $110,000 to $400,000. The insolvent city of Stockton, with a population of nearly 300,000 residents and home to America's second highest rate of foreclosure, has become the largest city in America to file for bankruptcy.

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