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Detroit Offers Pennies on the Dollar to Creditors

by . (Posted in: Debt, Insurance / Personal Finance News)


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Detroit is on the verge of filing bankruptcy. In fact, according to the city’s Emergency Manager Kevyn Orr, there’s still a “fifty fifty” chance it will find itself on the wrong side of a bankruptcy filing. This is part of a 135 page letter, proposal and explanation to its many creditors. He’s already met personally with many of those creditors to lay the cards on the table and find solutions.

It’s also believed that many of the debts won’t be made at all, at least during a moratorium the city is looking to put into place. It would affect any unsecured debt, such as credit cards. That could result in big problems for the city’s government. If the creditors do agree to the 10 percent on the dollar offer, it could help the city get out from under the crushing debt at a much faster pace.

Detroit

Detroit isn’t the first city to file bankruptcy; in fact, many city leaders have found themselves with no other alternatives to handling the debt. Since 2010, there have been 33 municipality bankruptcy filings. Still, they’re considered rare, even as many local governments continue to struggle after the recession. The biggest problem they have is paying off their debt and realizing they’re beating a dead horse, many have turned to the courts for assistance.

Consumers who have found themselves with no other option but to file bankruptcy know full well how overwhelming it is to no longer have the income to support their debt loads. The calls from creditors and collection agencies begin to increase, the fears and lost sleep increase as well. Studies have shown that most Americans do everything they can to avoid bankruptcy; however, for many, it’s their only way out of the insanity.

Hospitals Not Immune

This past March, the Hardeman County Hospital District in Quanah, Texas, announced it too was seeking bankruptcy protection. The fact that it’s a hospital could be indicative of the results of Obamacare. If the large hospitals are in that much trouble, for consumers, it surely feels much worse.

Here’s another bit of information you may not know: half the states don’t allow companies to enter into bankruptcy. For those states that do allow it, they often see more utility companies and other service based companies as much if not more than consumers. For consumers, their options are Chapter 7 or Chapter 13 bankruptcy filings. In business, it’s a Chapter 9 bankruptcy has handles those types of cases.

No one wants to see Detroit – or any city, for that matter – forced to file bankruptcy, but Detroit is spending far more than it’s bringing in. It’s facing a $380 million deficit. The city’s long term estimates say that number could rise to a whopping $20 billion in the long run. Orr isn’t necessarily doing anything to help his cause, especially considering the insults he tossed to anyone in attendance. He said he only wanted “people to behave rationally”, and that everyone should be working together.

Deficits and Revenue

This latest comes as Detroit continues to spend more money than it takes in as revenue. The city’s budget deficit could top $380 million by July 1, and Orr now estimates the city’s long-term debt at $20 billion. Orr has also put together an investment that includes a $1.25 injection into the city for police and fire with another $500 million to fight blight. The changes also extend into the pension and health insurance. While he’s not ready to go into those details, he did say a meeting next week will provide those details.

Referring to what got the city to this point, Orr compares it to kicking a can down the road,

What the average Detroiter needs to understand is that where we are right now is a culmination of years and years and years of kicking the can down the road.

The proposal, he says, isn’t designed to feel like a “hostile act” but rather, he hopes it’s the first step of many in the right direction. The city is tapped out and in order to turn the ship around,

We need to come up with a plan to restructure our debt obligations and our legacy obligations going forward – that is: pension, other employee benefits, health care, so on and so forth.

Repercussions for Entire Ciry

What happens will ultimately affect 10,000 current city workers, about 20,000 city retirees and more than 700,000 Detroit residents. It’s a huge burden and Orr knows this.

We have to strike a balance between our legacy obligations to our creditors, our employees and our retirees, and the duty we have as a city to 700,000 residents to give them lights, police, fire, emergency management, clean streets,

Orr said.

Orr knows what he’s talking about, even if he is less than smooth in his delivery. He’s a bankruptcy attorney who came to Detroit in March when a financial emergency was declared. He wasted no time in identifying the problems,

During the past several decades, the City of Detroit has experienced changes that have adversely affected the economic circumstances of the City and its residents,

the report states.

Other citations include a declining population, higher than the national average in unemployment, a tax base that is now eroding, a crime rate that continues to climb and, of course, the credit rating the city has that is anything but good. This culmination is going to be tough, time consuming and will require common sense and the assertive efforts like Orr is exhibiting. It’s going to take many years for a turnaround to happen, but Orr is the secret weapon none of the other bankrupt cities had and it could be the game changer for Detroit. The first goal, though, is to get the creditors on board. That just might be the most challenging aspect of Orr’s proposals.

Do you thing Orr is adequately serving the city’s needs? What should happen first? Share your thoughts with us – we want to hear from you.

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