California City Bankruptcy Means Creditors Lose 95%

Bloomberg reported that the city of Vallejo, CA is said to have proposed paying creditors as little as 5% of what they are owed. This would make it the first municipality or county to use bankruptcy as a way to force creditors to take less than what they are owed, since the Orange County bankruptcy in 1994. The city claims that it can no longer provide essential services like police and fire protection, and at the same time pay its debts.

The creditors, who are retirees and former employees, would be paid out $6 million over a period of two years. The plan will have to be approved by the creditors and the U.S. Bankruptcy Judge Michael S. McManus.

As we have reported previously, the U.S. Securities and Exchange commission (SEC) is ramping up its oversight of the municipal bond market over concerns that entities issuing municipal debt are failing to adequately disclose budget and other problems which affect the price of bonds purchased by small investors, according to a Fox Business Report. The primary focus of this heightened scrutiny is on states such as New Jersey, New York and California.

In other related news on this topic, Meredith Whitney, a prominent banking analyst, has recently reported that states and cities across the country are facing budget woes to the extent that some municipalities won’t be able to make their debt service payments and be forced to default. She went on to say that between 50 and 100 issuers of more than $100 billion will default. While she has her skeptics, it is abundantly clear because of what is going on in Vallejo that state and city budgets and revenues are being severely tested to pay off bond holders.

Our securities law firm can help you recover losses suffered from investing in municipal bonds. Please call 1-800-259-9010 for a confidential, no obligation consultation.

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