Chapter 7 - Solutions for a Financial Crisis » Chapter 7 Bankruptcy

Vallejo, Calif. is taking drastic measures in attempts to emerge from bankruptcy and reorganize their $51.6 million in debt.

According to an article in BusinessWeek, the city cannot afford to pay its debts and have been in negotiations with creditors in hopes to come to an agreement.

The city filed for Chapter 9 bankruptcy in May 2008. This bankruptcy chapter allows municipalities to reorganize their debt verses going to into liquidation.

Vallejo started having issues when the recession decreased collection on local government taxes.

In attempts to avoid bankruptcy, the city tried to convince the labor unions to accept salary wages instead of hourly wages. It was unsuccessful.

Since the city filed for bankruptcy, they could no longer afford to pay the current contracts of their union workers.

To cut down on spending, the city decided to renegotiate labor contracts with local police officers and administrative workers, and had some savings.

Vallejo is continuing to negotiate contracts with firefighters and electric workers. These negotiations will go to arbitration – a non-biased third party to review the process.

There are other possibilities to save the city money under the bankruptcy protection. Vallejo might propose to have a city vote on raising property sales tax.

They are also requesting to forgo principle and interest payments from their general funds. The city predicts that this will save them $3 million per year.

Vallejo did stop paying interest for the months of May to July. And from August on, the city has paid a two percent interest rate.

Vallejo’s revenue steadily decreased with the poor economy and harsh real estate market. The city predicted that property tax collections will drop 18 percent which could send them further into debt.

Vallejo is not the first city in California to file chapter 9 bankruptcy in search of protection from its creditors.

Desert Hot Springs filed for bankruptcy in 2001. The city was unable to spring back after a legal battle that they could not afford.

In 1994 Orange County filed one of the biggest municipal bankruptcies in U.S. history. The city allegedly made a lot of bad investments forcing it to file bankruptcy.

Vallejo hopes that possibly increasing taxes and cutting the budget will help them emerge from bankruptcy protections.