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Comparing bankruptcies: Is Chapter 9 like a Chapter 7?
Is Chapter 9 bankruptcy like Chaper 7?
4:30 PM, Jul 18, 2013
6:31 PM, Jul 18, 2013
(WXYZ) - Detroit has filed for Chapter 9 bankruptcy, but how is that different from personal or business bankruptcy?
HERE'S THE DIFFERENCE:
Millions of people go into personal bankruptcy each year, thousands of companies file for bankruptcy, but only a few cities have ever gone into bankruptcy and for good reason.
"There's a lot of pain that everybody suffers and there's a lot of uncertainty because there isn't this great track record, so nobody can say with certainty how things can work out," says Doug Bernstein, a bankruptcy expert.
Bernstein tells 7 Action News Chapter 9 is so rare there's no real road map for judges to follow and they can't use personal or business bankruptcies as a guide because they are so different.
"Whoever would be assigned to the case if Detroit files would be learning along with everybody else"
And unlike a business, which can sell its assets to pay off creditors, or a person that has a salary to satisfy creditors debt through garnishment, a city can't be forced to sell assets.
"The judge has less of a role because the judge can't be in the business of telling the municipality how to govern itself," says Bernstein.
And adding to the difficulty of a municipal bankruptcy, no loans are available.
Unlike a broke family member, Detroit doesn't have a rich uncle to give them an out and the government isn't going to loan the city billions, like they did when they bailed out General Motors (GM).
"You don't have the white knight in the form of the U.S Treasury with a loan or to bail the city out," says Bernstein.
Could the white knight be the U.S. or state government?
Michigan currently has a $500 million rainy day fund, but that's a drop in the bucket.
And bankruptcy experts say a government loan is highly unlikely, because it would set a precedent for future Chapter 9 bankruptcies to expect a handout.