Stockton City Bankruptcy

Yay! Stockton gets to stay in bankruptcy!

By Clint Smith

The bankruptcy judge in the Chapter 9 case of Stockton, California ruled that the case may proceed. Why is that news? Because Chapter 9, which applies to municipalities (cities and counties, mostly) is not automatic.

Creditors (or other interested parties, like employees unions) can challenge the city’s effort to discharge obligations in bankruptcy. The judge decided to allow the city to remain in bankruptcy, to attempt to reorganize its affairs and thereby treat creditors better than if it were forced to fight outside of the bankruptcy protection. Or worse yet, to sell off its assets.

So we will get a chance to see what the plan will be to pay creditors. This is a common goal of businesses seeking bankruptcy relief, like American Airlines or Hostess. The bankruptcy laws keep creditors off the back of the debtor while it catches its breath and then makes a proposal to rise from the ashes. America West (now US Airways) did that very successfully not too many years ago. Hopefully, Stockton will do the same.

There is another message here. Some of my clients wonder if they will be “granted” bankruptcy relief. Short answer: “Why are you asking that?”

Apparently, there is a concern out there somewhere that some people don’t “get to go bankrupt.”

False. Except for a few rare cases of multiple filings and abuse of the system, everyone can obtain relief in bankruptcy. Some may be required to reorganize (in Chapter 11 or 13) instead of liquidating (in Chapter 7), but they CAN get relief and protection from creditors.
So, no, don’t worry that a bankruptcy judge will hold high profile (or any) hearings with rooms full of lawyers to decide whether you may remain in bankruptcy court, like Stockton did. For us humans, its pretty much automatic.

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