On April 1, 2013, a federal bankruptcy judge approved the bankruptcy petition of Stockton, California, allowing the city to proceed under Chapter 9 of the Bankruptcy Code.  Stockton made history by becoming the largest U.S. city by population to file for bankruptcy, but it may eventually cede this title to another city that is also grappling with its financial woes:  Detroit, Michigan.

Detroit has been especially hard-hit by the recession and declining industry, losing approximately 25% of its population in the last decade.  Fewer people means fewer taxpayers.  The remaining residents, some living in near-vacant neighborhoods, are more reliant than ever on basic city services.  Still, Detroit’s budget is deficient, and there is not enough money to adequately and sustainably fund police and fire departments and other necessary services.

While all eyes have been on Stockton in recent days, Mo-Town shifted gears last month, appointing Kevyn Orr as its emergency financial manager. But Kevyn Orr is not a city administrator by trade; he is a corporate bankruptcy attorney.  To certain observers, bringing in a bankruptcy attorney signals the inevitability of a bankruptcy filing.  Yet, this may not be the case.  Mr. Orr has gone on the record asserting he favors a deal with creditors outside of the bankruptcy process.

So this begs the inquiry:  if a bankruptcy filing is not the end goal, why did Detroit appoint a bankruptcy attorney to take the wheel?   For starters, the introduction of a bankruptcy attorney brings a new tone to negotiations with creditors.  Creditors may want to compromise to avoid a bankruptcy filing, knowing a filing will almost always result in less-than-full repayment.  Simultaneously, these creditors know the bankruptcy lawyer is taking cautionary steps to best-position the city to file should negotiations fail.

Although a municipal bankruptcy is relatively unusual, the same basic principles utilized by Detroit apply to struggling businesses.  Much like Detroit’s city administration, business owners know when they are operating in an unsustainable manner.  Upon this realization, it is only logical to evaluate all options and take prudent action. 

Since bankruptcy can be a powerful and effective option, a bankruptcy attorney is an essential advisor to a struggling business.  As idiosyncratic as it seems, having a bankruptcy lawyer advise a struggling business may even help the business avoid bankruptcy altogether in some instances. 

Bankruptcy attorneys at Klenda Austerman counsel businesses and individuals in all phases of insolvency and reorganization, including creditor workouts, pre-bankruptcy planning, creditors’ rights, and bankruptcy representation.  If you have questions concerning these issues, please contact Klenda Austerman’s Bankruptcy Team.  For further information, please contact Eric W. Lomas at elomas@klendalaw.com.

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