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Is Pennsylvania's Opposition To Municipal Bankruptcy Foolish?

Posted By admin || 9-Nov-2011

Is Pennsylvania's Opposition To Municipal Bankruptcy Foolish?

The city of Harrisburg filed Chapter 9 bankruptcy to get a handle on debt that was literally destroying it.  But because the state of Pennsylvania opposes bankruptcy, the city is now facing cumbersome and tiresome measures to avoid both bankruptcy and being placed under the control of state officials.

In the resulting Chapter 9 filing, the city listed more than $60 million in unpaid obligations on about $242 million of debt tied to an overhaul and expansion of an incinerator that hasn't generated enough revenue to cover the obligations it incurred.

But the bankruptcy is on hold for now while City Council members are compelled to meet and attempt to resolve debt issues outside of bankruptcy.  The current measure is designed to ask creditors to forgive $100 million in debt.  But as anyone can guess, creditors don't just forgive debt because they have a good heart, instead they want to seize the city's assets and not only use those assets to repay debt but to make a profit.

Outside of bankruptcy, the city of Harrisburg may need to sell their trash incinerator, lease their parking facilities and even sell tax liens for pennies on the dollar if they want to make a dent in their debt.  But what about the future of the municipality? While the incinerator, parking facilities and tax liens will provide temporary relief from creditors, what will happen to the future revenue needed for the city? This is the problem with forcing municipalities, or individuals for that matter, to resolve debt issues outside of bankruptcy when it would be better to use the bankruptcy process. Bankruptcy is designed to help municipalities avoid the type of asset stripping that could occur if these measures are approved.  And as a result, the city of Harrisburg could not only lose future revenue, they could lose future residents.

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