When people usually think of bankruptcy, they probably think of consumer bankruptcy — either Chapter 7 or Chapter 13. Or they might think of Chapter 11 bankruptcy, which is typically filed by ailing businesses. However, there is another type of bankruptcy that is getting a lot of attention right now: Chapter 9, the type of bankruptcy used by ailing cities. Detroit recently became the largest city to file for Chapter 9 bankruptcy, but others may not be far behind — including Charleston, West Virginia.
A recent article noted that the City of Charleston was on a list of nine cities most likely to follow Detroit into bankruptcy. The main reason given was that Charleston had pension obligations to city employees amounting to $337 million in 2009, yet had funded only 24% of those obligations. That put Charleston in the worst financial shape regarding pensions of all nine cities. Given West Virginia’s “high levels of poverty and a declining population,” the city was unlikely to dig its way out of a hole any time soon. The others on the list were Chicago, Portland, Omaha, Minneapolis, Cincinnati, Providence, Trenton, and Santa Fe.
However, things may not be as dire for Charleston as they appear. The city manager notes that new legislation has allowed the city to alter its funding methodology, and that recently hired employees will not benefit from the same plans. The city manager added that while it will take time for the city to meet its financial obligations, it will do so eventually. Only rarely do cities file for bankruptcy over pension obligations alone.
Chapter 9, or “municipal bankruptcy,” first became available in the 1930s. Between 1937 and 2008, there were less than 600 municipal bankruptcies. Since then, at least 50 more have filed, including Stockton and San Bernardino in California, Bridgeport in Connecticut, and Detroit. Chapter 9 bankruptcies are similar to Chapter 11, in that they allow for cities to reorganize during the bankruptcy. Yet Chapter 9 also gives municipalities wider authority to rewrite collective bargaining agreements than businesses in Chapter 11, and to override state labor protections if necessary. The ability to rewrite collective bargaining agreements may help cities with pension agreements that may not be fundable.
Meanwhile, if you are struggling with your finances and need to hire a West Virginia bankruptcy attorney, you will likely file either a Chapter 7 or a Chapter 13. Chapter 7 bankruptcy is the most common and fastest-acting bankruptcy: a debtor can potentially wipe out debt in a few months. The downsides are that (1) certain assets, like the house or a car, may be used to pay creditors if they are nonexempt and have equity; (2) if these assets are exempt, but have no equity, Chapter 7 will not wipe them away, which means that once a debtor receives a discharge, the creditor can attempt to foreclose/repossess once more; and (3) once a debtor receives a discharge, he or she cannot file another Chapter 7 for eight years (or a Chapter 13 for four years). With a Chapter 13, a debtor can pay off part of the mortgage and avoid foreclosure, but he or she must have enough money to fund the payment plan, which lasts three to five years. A debtor is eligible to file for Chapter 13 bankruptcy if he or she has an income higher than the state’s median income. For more questions about which type of bankruptcy is right for your needs, contact an experienced bankruptcy attorney.