World of Finances

Hmm, with California’s huge budget problem, why hasn’t the state of California thought of declaring bankruptcy?

Well, that’s because states can’t declare bankruptcy.  But the former CEO of one of the world’s largest Fortune 500 companies and US Senate hopeful mistakenly advised on that fact.

Carly Fiorina, former CEO of Hewlett Packard and avid sheep advocate, made the comments on Monday during a round-table discussion with business leaders at a cement plant in the Inland Empire community of Colton. 

Municipal bankruptcy is somewhat separate from the usual suspects in bankruptcy – Chapter 7, Chapter 11 or Chapter 13.  Chapter 9 of the Bankruptcy Code applies to municipal bankruptcies and provides that an eligible “municipality” is a “political subdivision or public agency or instrumentality of a State.”

The key difference in a Chapter 9 and others, such as a Chapter 7 or 11, is that there is no provision for liquidation and distribution of the municipality’s assets to creditors.  It is simply a bankruptcy that allows the municipality to reorganize its affairs and do some debt negotiation.

Recently, the City of Vallejo in northern California filed for municipal bankruptcy. The city of Harrisburg, PA and San Diego, CA have both been throwing around the idea. 

But even talk of bankruptcy could cause problems for a municipality and mere consideration of bankruptcy could cause panic in the municipal bond market. Essentially, holders of municipal bonds begin to worry about their rights to the bond in the wake of the potential restructuring.

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There is an unfortunate stigma that is associated with personal bankruptcy that can negatively impact your life after personal bankruptcy. The thing many people who have not been through the process don’t realize is that bankruptcy is not usually due to one decision or action, nor is it always the result of being irresponsible with ones money. In fact it usually takes years of little decisions that weren’t all that great to get to the point of bankruptcy. Other times, such as the recent drastic downturn in the economy, a bankruptcy could come completely out of the blue. If both people in a family lose their jobs and are reduced to making a quarter of their previous salaries, there is no way for them to remain financially afloat. This can happen to people who have shopped and saved responsibly as well as to people who were less conservative with their money.

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