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Detroit Bankruptcy Represents Largest Municipal Case in U.S. History

Bankruptcy is most often used as a way for individuals and businesses to either discharge debts or reorganize them into a more manageable payment plan. But governments, particularly cities and counties, can declare bankruptcy as well for the same reason: unmanageable levels of debt.

Municipal bankruptcies are fairly rare. They have happened at the rate of about one per year since the Great Depression. But in the wake of the U.S. and global recession of recent years, the filing and/or consideration of municipal bankruptcies have become an ever-present part of the news.

Last year, the controversy in Detroit, Michigan dominated headlines for weeks. The city filed for bankruptcy, but the legality of the filing was in question for almost a year. Detroit filed for Chapter 9 bankruptcy on July 18, 2013. The next day, judge Rosemarie Aquilina ruled the filing violated the Michigan Constitution by interfering with pension payments. She ordered Michigan Governor Rick Snyder to withdraw the filing. Snyder appealed the ruling, and the Bankruptcy Court declared a federal stay of state laws to make the bankruptcy legal. After a trial for objections and several deadlines, the Bankruptcy Court ruled the filing legal in December 2013, and the bankruptcy procedure moved forward.

On June 3, the state legislature of Michigan passed a number of bills designed to prevent Detriot from falling into the same state of emergency again.

It was by far the largest bankruptcy filing of any municipality in U.S. history, both in terms of debt and in terms of the population. Detroit’s debt was estimated at $18-$20 billion, towering over the previous record-holder, Jefferson County, Alabama, which declared bankruptcy in 2011 with some $4 billion in debt. And Detroit’s population is about 700,000, or more than twice that of Stockton, California, which went bankrupt in 2012.

One of the main reasons for Detroit’s financial troubles is a steadily declining population and, therefore, tax base. Its peak population was 1.8 million in 1950. Other causes the city named in its bankruptcy filing were pension and health care costs for retired workers, a dismal rate of property tax collection – with nearly half not having paid for 2011 – budget deficits, government corruption and poor record keeping.

Many consider pensions for current retirees to be untouchable in bankruptcies. The question of whether the modification of debt obligations in bankruptcy proceedings trumps state constitutional protections of pensioners’ rights is being tested for the first time in a Chapter 9 case.

President Obama commented that the federal government is “committed to continuing our strong partnership” with Detroit, but he did not indicate any intention to attempt a bailout of the city, even when the bankruptcy was uncertain. Gov. Snyder has said he does not support the idea of a bailout, saying “accountable government” is the answer.

The ability of bankruptcy to allow individuals, businesses, and governments to move on from untenable financial situations is key to keeping our economy flowing smoothly, but when the livelihood of many thousands of pensioners is on the line, the issue becomes much more complicated.

Posted on Saturday, September 27th, 2014 at 11:08 am under Bankruptcy, News and Press.
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Consumer Bankruptcy Filings Decrease

According to data from 2012 and the first half of 2013, consumer bankruptcy filings are down, and experts expect the trend to continue.

In 2013, the government released data showing that consumer bankruptcies were down 13 percent in 2012. For the first half of 2013, bankruptcies were also down 13 percent from the same period in 2012. Sam Gerdano, executive director of the American Bankruptcy Institute, said that due to current low interest rates, households were “deleveraging.”

Deleveraging refers to reducing debt such as high-interest-rate credit cards, mortgages and vehicle loans, which can be accomplished by refinancing at a lower interest rate, taking advantage of government programs and avoiding taking on additional debt. Deleveraging is a step that can result in a better financial position for the individual consumer, making it less likely that a person will need to file for bankruptcy. Experts expect the deleveraging trend to continue.

According to Gerdano, the Home Affordable Refinance Program (HARP) has made it possible for many homeowners to refinance their mortgages and has contributed to the decline in bankruptcy filings.

Over time, fluctuations in bankruptcy filings have been caused by changes in the economy and the law. Filings peaked in 2005, with 2 million consumers declaring bankruptcy that year. The following year, Congress passed a reform bill that tightened bankruptcy requirements. Filings dropped to 600,000 in 2006, but then rose each year until 2010, when 1.5 million consumers filed for bankruptcy. Since 2010, filings have dropped steadily each year.

The rise in consumer bankruptcy filings coincided with the economic downturn. Now, although the economy has not been restored to full health, experts say that consumers are taking steps to deal with debt and are avoiding taking on additional debt. The bankruptcy reform of 2005 also contributed to the decline in filings, as it made filing for bankruptcy a less attractive option. 

Although bankruptcy is now more expensive and less forgiving, it is still an important option for consumers experiencing overwhelming debt.

The decline in bankruptcy filings is an important indicator of the overall health of the economy, showing that fewer consumers are in financial distress. And, while economic predictions are famously prone to error, experts say that with a continued decline in unemployment, low interest rates and the help of government programs like HARP, the decline in filings could continue well through 2014.

Posted on Thursday, September 18th, 2014 at 11:07 am under Bankruptcy.
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When Contemplating Both Divorce and Bankruptcy, Weigh All Options Together

Financial trouble plays a role in many divorces. Often, one or both parties are considering filing bankruptcy at the same time the couple is contemplating divorce.

Each spouse is equally responsible for debts incurred by either party while married. Debts will be divided equally between the two divorcing parties, but if one spouse becomes delinquent on payments, the creditor can legally try to collect the entire debt from the other.

Consider a couple who divorces and splits debts, after which the former husband files for bankruptcy. In this case, his former wife remains liable for the entire debt, not just her half. She can use the divorce agreement to compel her husband to pay his share, but if the husband simply cannot pay it, and the wife cannot pay the entire obligation, she remains stuck in debt.

In order for both the husband and the wife to escape the debt, they must both declare bankruptcy. Doing so decreases their debt burden, but it harms their ability to borrow. If the wife elects instead to sue the husband, her credit may not be affected, but she will remain in debt. Each option has serious downsides.

Divorcing couples who foresee any difficulty in making payments on debt should weigh all their options for bankruptcy and divorce proceedings at one time. They may find their best option is to declare bankruptcy jointly prior to divorce.

Court filing fees for joint bankruptcy are the same as for individual bankruptcy, and attorney fees for one joint bankruptcy are usually far lower than for two individual bankruptcies. In Florida, couples filing joint bankruptcy are allowed to double many exemptions. Exemptions are the assets that are protected from creditors and that remain the property of the bankruptcy filer.

For these reasons, bankruptcy before divorce may be a good idea, but it is not always the answer. A Chapter 7 bankruptcy is usually completed relatively quickly, and so is a workable option even if divorce is certain. A Chapter 13 bankruptcy, on the other hand, can last several years, and so is probably best filed after divorce.

The attorneys at Olivero Laws are well-prepared to help you understand the legal pros and cons of bankruptcy, divorce and legal timing.

Posted on Sunday, September 14th, 2014 at 11:09 am under Bankruptcy, Divorce and Family Law.
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To Ensure Wishes for Their Estates Are Met, Divorcees Must Consider Beneficiary Designations

Many people incorrectly contain their idea of estate planning entirely within the process of creating a will. They feel that as long as their will reflects their current wishes, they can rest assured that their rightful heirs will inherit their assets.

But in fact, many investment accounts, including 401(k) accounts and individual retirement accounts (IRAs), have beneficiary provisions that supersede wills. These provisions are sometimes called “substitute wills” because of their ironclad legal status.

Beneficiary designations on investment accounts are an important and useful estate planning tool. They enable the probate process to be bypassed for those assets, meaning their transfer to beneficiaries is quick and easy, with a minimum of paperwork or legal hassle. But just as efficiently as these provisions can bring about the decedent’s wishes, they can bestow assets upon the wrong person if they are not kept up to date.

This potential problem is aptly illustrated in cases of divorce. If someone names his or her spouse as beneficiary, then gets a divorce, but fails to change beneficiaries, the ex-spouse could inherit the bulk of the estate.

In a different example, a man has children from a previous marriage. He has since divorced and remarried. Because the law dictates that his 401(k) goes to his current wife by default, he must file certain paperwork if he instead wishes to leave the funds to his children. A prenuptial agreement to this effect is not enough; the man’s current wife must specifically relinquish her claim on the account.

The following must be considered to ensure retirement account assets go to the right people:

  • Beneficiary designations and wills should work together to form a cohesive estate plan. The estate itself may be designated as the beneficiary. This is useful when assets must be distributed in specific ways to achieve specific goals — to, for example, minimize taxes or qualify a special-needs child for government benefits.
  • A will should reflect and confirm beneficiary designations to minimize disagreement.
  • Divorcees should update the beneficiaries on their retirement accounts to reflect their current wishes.
  • Married and remarried individuals who wish to leave their 401(k) accounts to anyone other than their current spouses must file specific paperwork to that effect.
Posted on Thursday, September 4th, 2014 at 11:07 am under Divorce and Family Law.