City of Detriot Threatens Creditors With Bankruptcy
The Wall Street Journal recently reported that the City of Detroit has hired a bankruptcy attorney to tell their creditors to accept pennies on the dollar or be completely wiped out if the city files bankruptcy.
Kevyn Orr is the bankruptcy attorney that has been hired by the governor of Michigan to negotiate this debt restructuring. Mr. Orr states that the City of Detroit is currently insolvent.
Twenty Billion Dollars of Debt
The Journal reports that the city is $20 billion dollars in debt. Detroit has approximately 700,000 citizens. $20 billion divided by 700,000 = $28,571.00 of liability for each citizen. Who wants to move to Detroit right now?
Detroit’s bankruptcy attorney is trying to negotiate a settlement with the bondholders, insurers, unions and pension funds. I doubt that Detroit will be able to avoid bankruptcy because all it takes is one creditor to put their big thumb on the scales to tip the balance and make a settlement impossible.
For the same reason, debt settlement almost never works for consumers in Georgia. Under Georgia law, one creditor can garnish up to twenty five percent of a person’s take home income. If addition, a creditor can put a lien on any real estate you own. This lien will accrue at twelve percent interest until the debt is paid or the property is sold.
Since Georgia law is so favorable to creditors, there is little incentive for creditors to negotiate settlements.
Debt settlements work best in situations where:
- There are only one or two creditors and
- The consumer has a large lump sum of cash to offer in the settlement.
For example, I once had a client who was sued for a $30,000 deficiency judgment on second mortgage after her house was foreclosed after a divorce. In her specific situation, I did not want to see her file bankruptcy over just one debt. She had recently remarried and her new husband was able to give her $3,000.00 to settle the entire mortgage debt. I love happy endings!
What can a person do who has multiple creditors screaming for impossible payments? The good news for consumers is that Chapter 13 and Chapter 7 bankruptcy relief are available under federal law.