Find out if you can say “I told you so…”

Resnick Law, a Detroit bankruptcy law firm sponsored a survey to understand exactly what the country thinks may have caused the Detroit Municipal bankruptcy. Our goal was to identify the most notable causes, and ask the nation and Michigan what they thought was the greatest cause of Detroit’s Chapter 9 bankruptcy filing.

What is the cause of Detroit’s Municipal bankruptcy? To answer the question that is on everyone’s mind, we created a Google Survey and administered this question to people across the nation with the following options.

  • Mismanagement by City Government
  • Smaller Tax Base and Population Flight
  • Corporate Subsidies
  • Complex Financial Deals for Pensions
  • End of Revenue Sharing with Michigan.

We surveyed over 3,000 people (3,022 to be exact) with our survey asking for their opinion on the cause of Detroit’s bankruptcy. Nathan Resnick, Detroit Bankruptcy Attorney and founder of the Michigan Bankruptcy law firm Resnick Law had this to say  after reviewing the survey data “It comes as no surprise to me that most people blame the City leaders for the bankruptcy.  The former Mayor is in jail and the corruption was rampant in the media.  While I agree that the former regime certainly didn’t help the City’s financial woes, the crisis that caused the bankruptcy filing goes back for decades.  Young people point to corporations to as the source of the problem because they have not lived through the decades of mismanagement and malfeasance of City leaders. There are many causes of the bankruptcy filing, and hopefully new leaders in government will help turn the page as the City emerges from bankruptcy sooner than later.”

Cause of Detroit Bankruptcy

The people of Michigan and the nation believe whole heartedly with a handful of additional insights that Mismanagement by City Government is the greatest cause to Detroit’s insolvency. You can view the complete Google Survey data and insights here. Michigan did pick Mismanagement by City Government more often than the rest of the United States.

Mismanagement By Detroit City Government

 

It isn’t surprising to discover a consensus across states, incomes, and age ranges that blame Detroit’s bankruptcy on the municipal government. Considering the media has presented mismanagement as the ultimate cause of the bankruptcy. There were however, additional contributing causes and some of which had interesting insights.

Additional Insights:

  • Young People ages 18-24 believed that Corporate Subsidies were the cause of the city’s bankruptcy filing. This insight could be impart caused the distrust of corporations following the recession and the Occupy movement.

Corporate Subsidies

  • Urban Middle class respondents earning $25k – $49k blamed a shrinking tax base due to population flight.

Smaller Tax Base & Population Flight

  • Older respondents blamed the city’s government at a rate considerably greater than others

Older People Blame Detroit Government for Bankruptcy

 

The sample size was not large enough to draw many firm conclusions. However the trends are clear. The people believe that Detroit was mismanaged by its elected government which set the stage for their recent bankruptcy filing and financial hardship. It was however, not the sole cause of the bankruptcy and age plays a significant role in determining what the perceived cause of the bankruptcy was.

If you have questions, comments or would like to reach Nathan Resnick of the Resnick Law Firm for comment or permission to use this Survey. Please contact us here.

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In most divorce cases, a final judgment of divorce creates monetary obligations from one spouse to the other.   These inter-spouse divorce obligations are lawful debts and they are called “claims” for purposes of bankruptcy law.  A debtor who files bankruptcy is asking the Court to discharge as many of these divorce “claims” as they can.   A person, who is entitled to receive payments from a debtor in a bankruptcy, has a “claim” against that former spouse for the value of those promised payments or transfers.

Debts and claims that arise in a divorce case are usually classified in three ways for bankruptcy purposes; 1) Property Settlements, 2) Domestic Support Obligations (DSO) and 3) Other Non-DSO obligations.  Often, a non-DSO obligation to a former spouse may include one spouse accepting full responsibility of the joint debts incurred during the marriage, or to assume their spouses’ debts, or to agree to pay all the costs of both divorce attorneys, but they can take any number of forms.  Non-DSO obligations are similar to DSOs because they help one side maintain a certain lifestyle after divorce, but they do not quite meet the bankruptcy definition of a DSO.  Can a bankruptcy debtor discharge obligations they owe to a former spouse?  Do you know how bankruptcy law treats these obligations?  Does your divorce attorney know?

Generally, a divorce judgment provides for a division of marital property, and one spouse is required to turn over certain assets to the other.  These obligations are claims too, and under certain circumstances they may be discharged in either a Chapter 7 or Chapter 13 bankruptcy.  A divorce judgment may require one spouse to pay Spousal Support (Alimony) and/or Child Support to the other, these obligations are generally called Domestic Support Obligations (DSO).   The Bankruptcy Code defines a DSO as a debt that is owed to or recoverable by a spouse, former spouse, or a child, and the child’s parent, legal guardian, or responsible relative that is in the nature of alimony, maintenance, or child support without regard to whether or not the Judgment of Divorce expressly identifies the debt as a DSO.  The obligation must be established in a divorce decree, separation agreement, property settlement agreement or an order of a court.  A DSO obligation is not discharged in either a Chapter 7 or a Chapter 13 bankruptcy.

This article addresses claims that fall under the third claim type, the Non-DSO, claim. What happens to these claims in bankruptcy?  How does one plan for those?  Non-DSO claims create opportunities for the knowledgeable and the prepared, and problems for the unprepared.  The Bankruptcy Code defines a non-DSO obligation as a claim that is “in the nature of” or is similar to a DSO, but doesn’t fully meet the bankruptcy definition of a DSO.  A claim that meets the DSO definition is never discharged in any bankruptcy, but a “Non-DSO claim” may be discharged in a Chapter 13 Reorganization plan.   In a Chapter 13 plan, a debtor will make payments to creditors for 3 to 5 years, but in most cases, those payments are not enough to pay all claims in full.  It is common to see plans that pay creditors 10% or less of the value of their claims in a Chapter 13.  A properly prepared person who has a pending divorce may be able to structure a divorce judgment to preserve their options and protect their ability to discharge some of the obligations they take on during the divorce; or if they expect that they will be the one to receive payments in a divorce judgment, they should take steps to protect themselves so that those payment obligations are not discharged if their former spouse files a bankruptcy in the future.

It is common to see a person file bankruptcy soon after they divorce, so it becomes very important to be prepared for that possibility. It is very important to the person whose divorce judgment will entitle them to receive payments from a former spouse to be careful how their divorce judgment defines, negotiates and structures spousal payments.  One entitled to receive payments from a former spouse should seek to ensure that to the extent it is possible, that those payments and transfers meet the bankruptcy definition of a DSO, so that they are not discharged.  Likewise, it is very important to the person who must make payments or transfers to their former spouse, to attempt to ensure that these obligations are clearly defined in a divorce judgment so that they do qualify as a non-DSO obligation in order to preserve the right to discharge the debts if a Chapter 13 case becomes necessary.

At Resnick Law, P.C., we help people solve their financial problems, plan for their future and provide advice about assets, income and debts regardless of the circumstances they find themselves in.   If you are in a divorce or contemplating one, it is important that you understand that you are preparing for the future and you need to be prepared to protect yourself and your children for whatever the future has in store for you.  We recommend that you consult with attorneys who are knowledgeable with the interaction between bankruptcy law and divorce law.   If you would like to learn more about the options that might work for your situation, we encourage you to contact us by visiting our website or call us, Resnick Law, P.C., at (248) 642-5400 to schedule a consultation with one of our lawyers.

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Unexpected life events will continue to happen even after your bankruptcy case is filed.   It is not uncommon for a debtor in a bankruptcy case to experience the loss of a loved one.  Nor is it unusual for a debtor to learn that they will inherit money or property from that loved one.   What happens to that money or property when it is received during a bankruptcy case?   Do you have to tell the bankruptcy Trustee or Court?  Can you keep any of it?  Will the Trustee get it all?  The answer to these questions depends upon when the death occurred, what kind of property is involved, how the property or money was owned by the deceased person and the value of the property.

When a person files a Chapter 7 or a Chapter 13 Bankruptcy case, bankruptcy law creates a “Bankruptcy Estate”.   Nearly all of the debtor’s assets at the time that the case is filed are automatically deposited into the Bankruptcy Estate.   Normally, if you buy or receive new property after the bankruptcy case is filed, that property is not included in the Bankruptcy Estate, but as in all things, not all property is treated the same.   The Bankruptcy Code has special rules for property or money that a debtor receives by “bequest”, “devise”, or “inheritance” within 180 days of the date that the bankruptcy case was filed.  The Bankruptcy Code requires that the debtor notify the Bankruptcy Trustee and the creditors about the inherited funds and the debtor may be required to file written amendments with the Bankruptcy Court to disclose the inheritance.   Whether you are in a Chapter 7 case, or a Chapter 13 case, once the Trustee discovers your inheritance, there is a good chance that the Trustee may request that you turn over the property or money for the benefit of your creditors.

That is why it is very important that you contact your bankruptcy attorney as soon as you learn that you may receive an inheritance.   First, your attorney will help determine what you received.  Not all property received after a loved one’s death is legally a “bequest”, “devise”, or “inheritance”.   These are legal terms that have special legal meanings.  Your attorney should be able to evaluate your situation and determine if it is an inheritance or something else.  If it is an inheritance, your attorney will determine when you received it and how much you received. You have options and you may be able to protect all or a portion of the property and money you receive.  An experienced attorney, like those at Resnick Law, P.C., has the knowledge and experience to assist you to determine whether your inheritance has to be disclosed, to advise you of your legal options and help you to maximize the amount that you keep for you and your family.

At Resnick Law, P.C., we help people solve financial problems, plan for their future and provide advice about assets, income and debts when the unexpected occurs.  If you are having financial difficulty and you think that you may be entitled to receive property or money due to the death of a loved one, and you would like to learn more about the options that might work for your situation, we encourage you to contact us by visiting our website or call us, Resnick & Moss, P.C., at (248) 642-5400 to schedule a consultation with one of our lawyers.

 

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The City of Detroit filed a petition for Municipal bankruptcy protection under chapter 9 of the Bankruptcy Code on July 18, 2013.  Case No. 13-53846.   In a long anticipated decision, Bankruptcy Judge Steven Rhodes of the United States Bankruptcy Court for the Eastern District of Michigan today found that the City of Detroit is eligible to be a debtor under chapter 9 of the federal bankruptcy code.  The following is a summary of the issues that the Court ruled on today.

Whether Chapter 9 of the Bankruptcy Code is Constitutional.

  • Judge Rhodes ruled that the City Detroit is a “Municipality”.
  • Held:  “The court concludes that it has the authority to determine the constitutionality of Chapter 9″ and the Emergency Manager Law.”
  • “The popularity of a decision to appoint an emergency manager is not a matter of eligibility under federal bankruptcy laws.”
  • Judge Rhodes rejected the creditors’ argument that because Chapter 9 gives permission to make cuts to public pension obligations that makes Chapter 9 unconstitutional.
  • “The court concludes that Chapter 9 satisfies the uniformity requirement of the United States Constitution.”
  • Held: “Chapter 9 bankruptcy is constitutional”.

Whether Michigan’s Emergency Manager Law is constitutional.

  • Ct. stated that “There certainly was some credible evidence in support of the assertion” that the state Legislature attached a spending provision to the emergency manager law to prevent it from being overturned by referendum,
  • Stated that would not prevent a finding that it is constitutional.
  • Judge Rhodes says Gov. Rick Snyder did the right thing by refusing to attach a contingency to the city’s bankruptcy filing. “Any such contingency in the governor’s authorization letter and may have rendered the authorization itself invalid.”  (NOTE:  a reporter for the Detroit Free Press commented that this is a “Big win for the governor, who refused his own attorney’s advice. His attorney recommended attaching contingencies.”)
  • Judge Rhodes stated that the City of Detroit meets the legal criteria of obtaining the state’s authorization to file bankruptcy.
  • Held:  Michigan’s Emergency Manager Law is constitutional.

Whether bankruptcy law permits the City of Detroit to cut the pensions of public employees despite provisions in the Michigan Constitution that prohibit the government from doing anything to “impair”  or “diminish” pension rights.

  • Judge Rhodes stated that the issue regarding the City’s ability to cut pension benefits is “ripe” for the court’s determination.
  • “Resolving this issue now will likely expedite the resolution of this bankruptcy case,”
  • “There is no functional difference or meaning between ‘impair’ — or ‘impair and diminish.”
  • Judge Rhodes stated that the Michigan Constitution protects pension rights as a “contractual rights,” but bankruptcy law allows a debtor to impair contract rights.  “Moreover, where — as here — the state consents, that impairment does not violate the 10th amendment of the U.S. Constitution.”
  • Held:  The court will allow the City of Detroit to present a bankruptcy plan of reorganization that proposes to cut pension obligations to public employees.
  • But…. Rhodes warned the City of Detroit that just because pension rights can be impaired, that does not mean his Court will approve a plan with steep cuts.  Judge Rhodes essentially said pensions can legally be cut in bankruptcy — but that he won’t approve pension cuts unless the entire plan of adjustment is fair and equitable.

Whether the City of Detroit is or was insolvent at the time it filed Chapter 9.

Rhodes said the following:

  • “The court finds that the city was generally not paying its debts as they became due.”
  • “The testimony of Chief Craig (Detroit Police Chief) established that the city is in a state of “service delivery insolvency.”
  • “Sales of city assets … would not address the long-term” issues of the city.
  • Of rumors that the Emergency Manager may sell asset of the Detroit Institute of Arts (DIA):  One-time infusions of cash won’t fix things and “The enterprise must take extreme care that the asset is truly unnecessary in carrying out its mission.”
  • Judge Rhodes stated that witnesses for city of Detroit proved that a sale of assets would not have solved financial crisis, only delayed it.
  • Held:  “The court finds that the city does desire to effect a plan” to reduce its debts, (This is one of the key requirements of Chapter 9 bankruptcy.)
  • Held: “The court finds that the city of Detroit was and is insolvent.

Whether the City Negotiated with its creditors in Good Faith before filing Chapter 9?

  • Newspaper reporters for the Detroit Free Press commented that from the perspective of a person in the court room, Judge Rhodes was not impressed with the City’s negotiations.
  • Judge Rhodes stated of the City’s take it or leave it offer to creditors prior to filing for bankruptcy protections:  “Charitably stated, the proposal is very summary in nature,” “The creditors cannot be faulted for failing to offer counter proposals when they did not have enough information to evaluate the city’s initial vague proposal.” Allowing only a month to negotiate was not enough. “This calendar was very tight and did not request counter proposals.”  “That amount of time is simply far to short that such a vague proposal of creditors.”
  • Held:  The City of Detroit did not negotiate in good faith with its creditors before filing bankruptcy.

Whether the City filed the Chapter 9 Bankruptcy in Good Faith?

Rhodes specifically acknowledged several of the Creditors’ arguments that the City’s bankruptcy filing was not done in good faith in his decision:

  • Judge Rhodes mentioned: “The city of Detroit’s bankruptcy was the intended consequence of a long-term strategic plan,”
  • Judge Rhodes recited what he calls the creditors’ “composite narrative” — that the bankruptcy was fixed.
  • Judge Rhodes mentioned the argument that the bankruptcy was a “foregone conclusion.”
  • Judge Rhodes mentioned the argument that the state government was “starving the city of cash” to trigger the bankruptcy.
  • But, then Judge Rhodes stated:  “In some particulars, the record does support the objectors view” … but it’s not enough…”  “Certainly the court must conclude that the bankruptcy filing was a foregone conclusion, at least in 2013.”
  • Judge Rhodes determined that negotiating in good faith was “impracticable” and stated that “The totality of the circumstances” shows the city filed for bankruptcy in good faith.
  • Held:  “(The court) finds that this case was filed in good faith and should not be dismissed.”

 Regarding Appeals of his decision:

  • Judge Rhodes says he will not issue a stay on the bankruptcy, meaning the case will proceed even if creditors file appeals.
  • Appeals of bankruptcy decisions are usually made to the U.S. District Court for Eastern Michigan in Detroit, but creditors may wish to skip an appeal to the District Court and the law does allow an appellant to request a direct appeal to the next higher Court, the 6th Circuit Court of Appeals, in Cincinnati, Ohio.
  • Judge Rhodes ruled that any creditor or objectors who want to appeal directly to the 6th Circuit must file separate motions.
  • The Free Press reported that the hearing concluded at about 11:34 a.m. and attorneys for the labor union, AFSCME,  wasted no time in filing its Notice of Appeal.   Court records show that AFSCME filed the first appeal this morning at 11:36:20 a.m.

If you have contracts with the City of Detroit or any city that has filed for bankruptcy protection, you undoubtedly will have questions regarding how the City’s bankruptcy case will impact you.  Vendors and contractors are strongly recommended to contact a Bankruptcy attorney before making any decisions regarding their performance under their contracts with the City of Detroit or any municipality that has filed a Chapter 9 case. To learn more, please schedule an initial consultation at the Bloomfield Hills law firm of Resnick Law, P.C., by calling 248-642-5400 or contact us online.  Our attorneys will explain the Chapter 9 Bankruptcy process, what the municipality can and cannot do and what other options might be available for you.  We can help you understand the Chapter 9 legal process, and assess the status of your current contracts and your ability to receive payment for amounts due on completed contracts.  You choose the course of action. We will provide the services and representation needed to achieve your goals. Contact us now via our online form or call 248-642-5400.

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Bankruptcy and Credit Reporting

by Mark Bredow on October 3, 2013

The Fair Credit Reporting Act (FCRA or “the Act”) was created to ensure that information included in consumer credit reports is accurate.  The Act requires consumer reporting agencies to adopt reasonable procedures to meet the needs of creditors for consumer credit information but also to ensure that the information is fair and equitable to the consumer.  The information should be confidential, accurate, relevant, and properly used.  The filing of a bankruptcy is a significant reportable event in any credit report so the Act allows any bankruptcy cases to be reported.   It also contains specific rules regarding the how long bankruptcy may appear on a credit report and what may be reported.

A consumer credit report may include information that an account was discharged in bankruptcy and may report the filing of the bankruptcy itself as long as it reports a zero balance due to reflect the fact that the consumer is no longer liable for the discharged debt. Information stating that a bankruptcy was filed may appear on a credit report for ten (10) years from the date that it is filed. Information regarding any individual credit account that is included in the bankruptcy may be reported separately for seven (7) years.

The Act requires creditors to update information to reflect all current and available information regardless of when the bankruptcy was filed.  To do that, credit reporting agencies must require the creditors who publish with them to notify the agency when any significant changes occur in the account, even if the debt is included in a bankruptcy.   For example:

  • If a previously past due account has been reaffirmed in the bankruptcy, it should not be reported as discharged.
  • If a debt that was previously discharged in bankruptcy, but was paid off after discharge, that favorable fact should be reported also.
  • If the bankruptcy case has been dismissed, these facts should also be reported.

If you have any objections to the accuracy of the information in your credit report, you may request a re-investigation by submitting a written investigation request directly to the credit reporting agency.  The agency is required to re-investigate every request and to record the current status of that information unless it has reasonable grounds to believe that the dispute by the consumer is frivolous or irrelevant. If information is inaccurate or can no longer be verified, the consumer reporting agency must promptly delete the information. But, if a consumer and a creditor merely disagree about a disputed fact, that disagreement does not, all by itself, constitute reasonable grounds for believing the dispute is frivolous or irrelevant.

The attorneys at Resnick & Moss, P.C. encourage all of our clients to review their credit frequently.  Please visit http://www.annualcreditreport.com to obtain a free credit report.    If you need additional assistance with an inaccurate credit report, or if you need assistance with your financial struggles or other debts, we can provide advice and recommend solutions.  Please do not hesitate to call, Resnick & Moss, P.C., at (248) 642-5400, for a free telephone consultation.

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