Stockton takes a step closer to becoming the largest municipal bankruptcy in history

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 $38 million.

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.