What happens if your city goes broke, files bankruptcy?

October 14, 2012 Posted in Firm News

Oct. 14, 2012 - Bankrate Inc. - Municipal bankruptcies are nothing new, but several recent landmark filings have transformed Chapter 9 of the U.S. bankruptcy code for municipal reorganization from a relatively obscure body of law into a hot topic. Residents of struggling cities are wondering what the possibility of bankruptcy means for them.

But the bad economy has forced many cities to cut services to the bone, says Luis Salazar, a bankruptcy lawyer in Coral Gables, Fla., who served as a city councilman in Leonia, N.J., when that town faced a budget crisis in the late 1980s and early 1990s.

"A lot of these cities have already made severe cuts, so it's not clear how much worse services can get," Salazar says. "You still need cops, and you still need to put out fires."

But there is a silver lining in bankruptcy, according to Salazar. The city gets breathing room from creditors.

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