the Coming Crisis – Part Ii

Pension Plans And The Detroit Municipal Bankruptcy

Please read Part I of this series on Pension Plans and Municipal Bankruptcy to gain a better context for this and the following blog articles on Municipal Bankruptcy, Detroit, and the coming crisis in governmental pension plans.

   According to the Chicago Tribune, the City of Detroit proposed a plan to US Bankruptcy Judge Steven Rhodes, in Detroit, that would adjust the approximately 18 billion dollars in debt acquired by the city. The debt acquired by the City of Detroit was made not only through the declining tax base experienced by the City because of the flight of both white and black professional s and businesses from the city, but also through many decades of blatant and obvious mismanagement by the city’s elders.

In a municipal bankruptcy, as in a Chapter 13 bankruptcy or a Chapter 11 bankruptcy, the debtor is assigned the task of creating or proposing a plan under which such debtor feels he or it may reorganize successfully its debts. The creditors in each of these types of bankruptcy, in various levels of participation, are given an opportunity to approve or disapprove the terms of the proposed plan.

Some creditors, although they may disapprove of the terms of the plan, may still have to comply with its terms. Some creditors, depending on how the debt they are owed is classified, may receive little or none of the money which they are owed. Some creditors may receive relatively generous treatment under such a bankruptcy plan. The Bankruptcy Judge has the ultimate power to cram-down opposition to the plan if he or she finds that the plan does not unfairly discriminate and is equitable and fair to those creditors.

The next article will discuss more of the particulars of the Detroit Bankruptcy Plan as proposed in late July of 2014.