Strategies To Avoid Municipal Bankruptcy In California

In the face of ever-dwindling revenues and, in spite of the increase in cities filing for Chapter 9 protection in California and across nation, most municipalities would still prefer to avoid the formal filing of bankruptcy. The stigma of filing holds many back as do the financial consequences tied to such drastic action. Naturally, most municipalities look for alternatives to formal bankruptcy filing.

For years, experienced insolvency attorneys have used informal "reorganization" as a tool to resolve the financial distress of their private clients without putting them through the agony, expense and uncertainty that always accompanies legal proceedings. The same tools used in these "private" arrangements are also useful in the public arena.

Transparency is a term that is used a lot these days and means different things to different people. In the context of debt resolution it really means just that. A common reaction of creditors learning for the first time that they are going to be paid less or not at all is incredulity; they simply do not believe that the debtor cannot pay. That becomes the creditor's reality. Until the debtor shows its true financial condition, the creditor will continue to believe that it could be paid more than what is offered.

As a result, the first strategy of a debtor, municipal or otherwise, is to educate its creditors as to the true financial condition. How this is done is critical. In most cases it is preferable that the debtor take the lead in making the explanations rather than using an accountant or attorney. However, this is not always practical. In some situations the disclosures that would be most useful to relieve the disbelief is also sensitive and damaging if disclosed to a competitor. In these situations it would be best to use a third party who has credibility to report to creditors without having to disclose sensitive information. Most of the time, however, the degree of insolvency and its causes are not sensitive and need to be disclosed.

The process of education will take some time for the creditors to both understand and emotionally "catch up" to the intellectual understanding of the facts. Some will grasp it sooner than others. In situations where a good rapport is established, the creditors themselves may have useful suggestions or alternatives not considered by the debtor and may provide better solutions than originally conceived by the debtor and its professionals.

After establishing the true...