VALLEJO, Calif. (KABC) -- A northern California city is a step closer to becoming the largest in the state to declare bankruptcy.
The Vallejo City Council voted unanimously Tuesday night to declare bankruptcy.
The San Francisco suburb of 117,000 faces a projected budget deficit of $16 million and has no money in its reserves.
Some blame the shortfall on overly generous pay and benefits to city police and firefighters.
The decision followed hours of public comments and months of failed negotiations with police, fire and other unions.
City gone bankrupt
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- Flying bird
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City gone bankrupt
So what exactly becomes of the city when it declares bankruptcy??
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laffo.
The same thing that happens when a person declares bankruptcy, more or less: the creditors get hosed out of their money, and the bankrupt entity's credit rating goes in the toilet. They have much greater difficult obtaining loans and doing other financial transactions. The tricky part dealing with city bankruptcy is that the main creditor is usually the state.
More details: San Jose Mercury News
The same thing that happens when a person declares bankruptcy, more or less: the creditors get hosed out of their money, and the bankrupt entity's credit rating goes in the toilet. They have much greater difficult obtaining loans and doing other financial transactions. The tricky part dealing with city bankruptcy is that the main creditor is usually the state.
More details: San Jose Mercury News
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Need to add a bit to Hostrauser's explanation ... municipal bankruptcy (Chapter 9) is covered by Federal Law. Since the Constitution states that State Law is supreme, states must decide whether a municipality can or cannot file for debtor protection under Federal Law (there is actually a Supreme Court case on this). In order to avoid a legislative mess, 40 of 50 states basically said "We'll use the Federal code"; the remaining 10 plus territories have varying levels of approval or their own laws.
When the state is named as a creditor in a municipal bankruptcy, they cannot assign their own receiver/trustee (which would be a conflict of interest). The clerk of the court does not automatically assign a local judge either so as to avoid politics. Also the trustee/receiver has less control.
For all you legal eagles, more at
http://www.uscourts.gov/bankruptcycourt ... .html#case
BTW - I was a legal secretary and studying for my paralegal in Bankruptcy Law (with credit counselling) for 5 years about 25 years ago. The Bankruptcy Laws have changed a couple of times re: specifics, but the basics are still the same on the most part.
When the state is named as a creditor in a municipal bankruptcy, they cannot assign their own receiver/trustee (which would be a conflict of interest). The clerk of the court does not automatically assign a local judge either so as to avoid politics. Also the trustee/receiver has less control.
For all you legal eagles, more at
http://www.uscourts.gov/bankruptcycourt ... .html#case
BTW - I was a legal secretary and studying for my paralegal in Bankruptcy Law (with credit counselling) for 5 years about 25 years ago. The Bankruptcy Laws have changed a couple of times re: specifics, but the basics are still the same on the most part.
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maybe these municipalities can borrow money from China!
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