THE BLOG
09/03/2015 05:56 pm ET Updated Sep 03, 2016

Bankruptcy Cases Fall Nationwide but Still Have a Big Impact

Some businesses and individuals are forced into filing for bankruptcy due to bad decisions or just plain bad luck. The number of cases has fallen nationwide, but with entire cities filing for bankruptcy, the ripple effect of each bankruptcy can still be enormous.

The total number of bankruptcy cases filed in the U.S. has dropped by more than 660,000 since 2011. Businesses filing have been reduced by more than 50 percent, and 48 percent fewer individuals and families have had to resort to bankruptcy in 2015 versus 2011. This is a strong indicator of economic growth, but it is important to remember that the 911,086 bankruptcies that have occurred in 2015 have been an important option for people who were still drowning in debt.

It is also vital to look at the breakout of bankruptcy cases per area to get a true feel for how every state and county is currently doing from an economic standpoint. According to Lexington Law, counties that have a higher prevalence of people living below the poverty level are much more likely to experience a disproportionately large number of bankruptcy cases. In fact, eight of the top 10 counties for bankruptcies have a higher amount of residents who are living in poverty than their respective state's average.

Southern states such as Georgia, Tennessee and Arkansas contain the largest percentage of bankruptcy cases. Kentucky is another state where people and businesses have a higher risk of ending up filing for bankruptcy due to economic factors.

Sadly, the town of Hillview, KY, which is a suburb of Louisville, filed for Chapter 9 bankruptcy on August 20. The town of 9,000 lost a legal case that involved a land dispute, and this left an already severely stretched budget responsible for paying the winning party $11.4 million. To put this into perspective, Hillview's annual budget is only $3 million. Although Hillview appealed the original decision, the city now owes a staggering $15 million due to interest fees. As a result, city officials have indicated that they had no choice but to file for bankruptcy.

In the past 25 years, there have been a combined 54 town and counties throughout the U.S. that have filed for Chapter 9 bankruptcy. This particular version will enable Hillview to refinance their debt and avoid new interest charges on their massive debt. This is probably the only way that a city such as Hillview can deal with a situation of this magnitude, but residents should buckle themselves in for a bumpy ride.

To date, Detroit, MI, is the biggest example of a city turning to Chapter 9 bankruptcy in order to deal with financial issues. When the case was filed on July 18, 2013, the city had an estimated $20 billion in debt. There was a lot of controversy regarding this action, including a restraining order that was issued by a circuit court judge a mere 24 hours after the initial filing. Circuit Court Judge Rosemarie E. Aquilina declared that Detroit's bankruptcy attempts were unconstitutional due to the city's pension program.  

Ultimately, Detroit was allowed to go through with the bankruptcy, and the city's debt was restructured. As a result of this, many residents dealt with issues ranging from street lights staying turned off at night to a devastating water shutoff plan that left approximately 27,000 houses without access to clean water. The United Nations even got involved, along with several activist groups, but mass shutoffs happened through the summer of 2014 and started again in May 2015.

It is too early to know if Hillview's residents will find themselves in a position that is similar to what happened in Detroit, but it will not be surprising if many basic services are at least temporarily halted. After all, a city that is trying to deal with a large quantity of debt typically cannot justify paying for things such as holding their annual Winter Fest or operating a skate park. In other words, residents who are not responsible for the city's financial woes could still end up suffering until the bankruptcy has been resolved.

Interestingly, Detroit and Hillview do not rank inside the 10 counties with the highest number of bankruptcy filings. This highlights the disparity that can exist between a county or city's financial status and that of its residents. The area that currently has the highest percentage of bankruptcies per capita is Jefferson County in Arkansas. Detroit and Hillview are also not represented within the five states with the most filings: Tennessee, Georgia, Alabama, Illinois and Utah.

Business filings can have an equally big impact on employers, customers and people in the surrounding area. Chapter 11 bankruptcy, which is the type that Presidential candidate Donald Trump has used four times, keeps companies operational by allowing them to reduce their debt. In some cases, this includes debt that is owed to employees, and it may be necessary for some workers to be laid off. In one recent example, a tech company and former Apple supplier announced the need to lay off 40 percent of their employees as part of their plan to exit Chapter 11 bankruptcy.  

Taking steps to reduce debt is a responsible choice. Before bankruptcy becomes a necessity, businesses, individuals and families can reach out to their creditors to ask for a restructured repayment plan. In many cases, it is possible to reduce the monthly payment amount or even freeze interest rates for a small period of time. However, when all else fails, bankruptcy can offer some much-needed financial protection.

The reality is that bankruptcy can be the best way for a company, individual or city to move forward after getting buried under a mountain of debt. However, it is critical for everyone involved to be aware of the damage that it can cause on a temporary basis. Once all of these factors have been considered, anyone who chooses to move forward with bankruptcy needs to retain the services of a skilled legal firm to help ensure that the process is as smooth as possible.