The city of Vallejo, California, proposed paying some creditors as little as 5 percent of what they are owed, making it the first general municipality that would fail to fully repay its debts in bankruptcy.
General unsecured creditors would collect 5 percent to 20 percent of their claims under the plan of adjustment filed late yesterday in U.S. Bankruptcy Court in Sacramento, the state capital.
No city or county has used federal bankruptcy laws to force creditors to take less than they are owed, according to Bruce Bennett, the lead lawyer for Orange County, California, when it filed the biggest municipal bankruptcy in the U.S. in 1994.
Vallejo’s plan assumes the city can’t provide essential services, like police and fire protection, while also paying its debts, he said. Should the city succeed, the case “may become an important precedent,” Bennett said in an interview.
Translation: The city of Vallejo, California just told all the people it owed money to that the best they are ever going to see after bankruptcy is 20 cents on the dollar. No city has ever said "We can't pay back 100 cents on the dollar" before in a federal bankruptcy. Nobody. Some of the creditors will see as little as five cents on the dollar on this plan.. Vallejo isn't a small city, either, well over 100,000 people live there. If this bankruptcy plan is accepted and Vallejo wins its bankruptcy case, you are going to see a slew of US cities do the same thing...and take the municipal bond market with it.
It's going to be brutal should that happen. This one might open the floodgates, folks. A municipal bond meltdown would follow, and our economy with it.
Between this and foreclosuregate, it's a race to see which time bomb will rip what's left of our economy to shreds first.