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City shows how bankruptcy can lead to better financial outcomes

When most people think of bankruptcy, images of struggling families, foreclosures and small businesses closing down are conjured up. While this is sometimes the case, financial problems are more widespread than that. Even big companies and whole cities are not immune from overwhelming debt.

Formerly industry-dependent cities have been particularly susceptible to falling on hard times in recent years. New Hampshire residents will be watching carefully as these American cities try to pull out of bankruptcy. In particular, Detroit is a demonstration of how a proactive debt management plan can help get through financial problems -- lessons that individuals who are contemplating bankruptcy can take to heart.

Detroit recently scored a victory after negotiations with a group of general bondholders bore fruit. The bondholders have agreed to let the city divert a significant chunk of the taxes they are owed toward paying more vulnerable debtors. These debtors are made up of pensioners and their dependents for the most part.

The arrangement is supposed to have a three-fold effect. It is aimed at convincing pensioners to vote for a restructuring plan formulated by the city’s emergency manager. The bondholders themselves are supposed to back the repayment plan as part of the deal. The approval of the bondholders also shows that the deal is fair to creditors. This will be important in obtaining approval from a judge when the deal goes before court in July.

The city is also expected to make another deal with a separate group of general obligation bondholders. These agreements will mean the city has more cash to use for services and paying other creditors. Detroit is proactively using bankruptcy protection to deal with its financial challenges. No matter how bleak the situation seems, bankruptcy might be the path to a fresh financial start.

Source: Detroit Free Press, "Detroit bankruptcy bond deal frees up $56M for pensioners, Orr says," Nathan Bomey, April 9, 2014

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