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Local creditors loaned to city of Detroit

12:03 AM, Jul 26, 2013   |    comments
West Michigan businesses and individuals are listed among the thousands of creditors in Detroit's bankruptcy case
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GRAND RAPIDS (WZZM) -- Detroit's problems are not just Detroit's -- the city's bankruptcy case shows it has upwards of 100,000 creditors that loaned the city property, services, or money.

The creditors include businesses and individuals, and dozens of them are based here in West Michigan.

WZZM 13 News spoke with an expert bankruptcy lawyer to get a sense of what this means for them.

There are more than 3,000 pages listing all of the city's creditors.  We called creditors in the Grand Rapids area, many told us they used to do business with the city of Detroit, but no longer do.

Nelson Miller, associate dean of the Cooley Law School, says that makes sense.

"We've already seen the handwriting on the wall for Detroit," he says.

Miller expects there are few businesses that have been banking on collecting unsecured debt from the city of Detroit.  The city owes an estimated $18.5 billion to employees, retirees, bondholders, businesses and properties with tax claims.

Because this is Chapter 9 municipal bankruptcy, Miller says creditors lose most of their power in bargaining.

"What's important is what kind of claim they have," he says.

What's crucial for the creditor is what kind of claim they have -- secured or unsecured.

"A secured claim, in which the creditor is likely to get all of its obligation paid back, or at least to the extent of its security," he says Miller.

If Detroit doesn't pay, the creditor can take the property.  But it's a different story with an unsecured claim.

"It is the case for many individuals and some businesses, too," Miller says of creditors with unsecured claims.  "They are likely to get very little if anything.  There's a good chance of getting nothing."

An injury claim is one example.  "If someone were seriously injured and had a $100,000 or million judgment against the city, that could be wiped out," the professor explains.

Miller says the creditors who should be most concerned are people with pensions.  He says they are protected by the state constitution, but in his opinion it's evident the city is unable to pay them.

Miller advises creditors to follow these steps right now.

  1. Don't do anything outside of the bankruptcy court if it has to do with trying to collect your debt.  Bankruptcy court has made it clear only it will make all the decisions on the debts.
  2. Creditors should be getting notices of the bankruptcy filing and the debt they hold.  Examine the notice, see if it shows the full amount of the debt.
  3. In this case, Miller says, the bankruptcy code doesn't require creditors to present a proof of claim.  But creditors may still present proof of claim, especially if the city doesn't list the full amount of the debt.
  4. In court, prove the debtor does owe the money, perhaps even more than the notice says. The court would adjust the claim.
  5. A creditors' committee will be formed.  They won't have as much power as they usually would, but if you have a lot of money, you may want to participate on the committee.  The committee will hire lawyers and advocate

"If you're a small player though, you're on the sidelines," says Miller.

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