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Another Lesson from Detroit: Bankruptcy Is Expensive

Detroit Struggles To Re-Build A Bankrupt City Amidst Poverty And Blight

Cities don’t need more reasons not to go bankrupt, but here’s another one anyways: it’s extremely expensive. Detroit is learning that lesson the hard way.

As the city prepares for bankruptcy, it is hiring lawyers, consultants, administrators and appraisers, racking up massive bills in the process. The city has already spent $19 million in this manner, and one analyst estimates that such expenses could cost the city $100 million when all is said and done.

As the New York Times reports, these expenses won’t exactly break Detroit’s bank, so to speak, but they are probably unavoidable:

The costs…will fall far below the totals spent in major corporate bankruptcies. Because municipal bankruptcies, known as Chapter 9, are extremely rare, they require expertise from a relatively small cast of lawyers and consultants, the experts said, particularly given that the city’s creditors have hired their own top-flight lawyers. Meanwhile, most of the city’s consultants are seeking significantly less in Detroit’s circumstances than they usually do. Conway MacKenzie, for instance, is charging 25 percent less than its usual rates, the company said.

This is yet another reason why cities need to address their debt and pension problems before they metastasize into something much worse. Who knew being broke could be so expensive?

[Remnants of Detroit’s historic Eastown Theatre are seen on September 4, 2013 in Detroit, Michigan. Photo courtesy of Getty Images.]

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  • ColoComment

    The Bankruptcy Code also gives these administrative type expenses (lawyers, accountants, experts & consultants) payment priority over secured and unsecured creditors. If the debtor has any assets and/or cash flow at all, it’s a pretty good gig for those folks.

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