Welcome to Bankruptcy, USA

December 29, 2010

Last Week, Meredith Whitney (“The Woman Who Called Wall Street’s Meltdown”) suggested on 60-Minutes that U.S. municipalities – loaded with debt and suffering from anemic revenue streams – could begin defaulting in record numbers during 2011.

This week, we learn of Hamtramck, Michigan.  This small town believes it may not be able to meet its obligations (debt, pension payments, city services) beyond March 1.  After that?  The city has been asking the state for permission to declare bankruptcy.  The Hamtramck city manager says:

“The state is concerned that if they yes to one, if that door is opened, they’ll have 30 more cities right behind us…But anything else is just a stop gap.  We’re going to continue to pursue bankruptcy until the door is shut, locked, barricaded, bolted.”

Just how does a municipality declare bankruptcy?  Chapter 9.

Research References

See chapter 90 of Norton’s Bankruptcy Law and Practice (NRTN-BLP).

For an interesting explanation of a Chapter 9 framework, see American Bankruptcy Institute Journal’s The Next Chapter for Municipal Bankruptcy, 29-JUN Am. Bankr. Inst. J. 14. (To pull the article, we searched Journals and Law Reviews (JLR) for ti(municipal! city town county /2 bankrup! insolven!).)

For filings, try starting with flt(9) in the bkr-all database. FLT = filing type.

It is worth noting that Whitney’s forecast of hundreds of billions of dollars worth of defaults has been roundly criticized as being overstated by many other market commentators.

With the New Year approaching though, we will soon know if Ms. Whitney should more aptly be referred to as Cassandra or simply be deemed to have jumped the shark.

Happy 2011!