It is a horrible business for those companies and individuals who after valiantly, in most cases, attempting to keep their finances above water, now must face the realisation that all efforts were for naught. They are insolvent, and must begin the long navigational swim back to financial security.Bankruptcy filings and settlements provide steady business for attorneys, bankruptcy trustees, administrators, courts, and the like that are charged with winding up the unfortunate individual, company, town, municipality, or city’s financial affairs. In a word, the process is like a stressful fire sale with a very controlled end point, because bankruptcy is the last resort for those who have completely run out of options.According to the United States Federal Court system, for instance, the fundamental goal of bankruptcy is to give debtors a relief from burdensome creditor debt, and a fresh start unhampered by pressure (to repay) current debts. The legal process is called a bankruptcy discharge, whereby a bankruptcy trustee (generally, a judge assigned to bankruptcy court) arranges a settlement or reorganisation of contracts, debts, assets, and related obligations to employees and creditors; then, provides a specific release from further liability for the amounted debts, alongside an order prohibiting current creditors from taking any future actions against the debtor (individual, company, or municipality) from collecting on these debts.The first priority for the bankruptcy trustee is to implement an action plan according to the bankruptcy structure for that town, or municipality, and state. It starts with the accumulation of an exhaustive list of the financial assets, liabilities, both current and contingent, contracts and leases, and any other items that have encumbered the municipality’s ability, in general, to operate independently.In a corporate bankruptcy, these assets will be liquidated if reorganisation is no longer viable as best possible prices given market conditions that may not be favourable to good valuations. The intent, wherever possible, is to generate cash that can be used to satisfy creditor demands, in whole or in partial redemption. Creditors are formally notified through public media and mailings that they have a certain window of time to produce authentic verification of their claims.Certain creditors will have secured rights against properties or contracts, as the case may be, but there usually is no clause that stipulates that all creditors will receive the same percentage amount. Creditors, particularly those that have unsecured claims, understand that they may not receive in the vernacular “100 cents on the dollar” as very often their final claims payment may be significantly less as the remaining pie is divvied up.The pecking order payment of creditor claims is legally mandated. Generally, the trustee, accountant(s), attorney(s), related administrative fees and certain taxes are paid first. Then secured and priority creditors, that is those that have a perfected interest in say a piece of property with an attached lien collateral; next, unsecured priority short term employee wages, vacations, etc. and contributions to employee benefit plans; employment tax withholdings, property taxes, excise and other taxes, then the remaining unsecured creditors.The bankruptcy of a municipality (under US Chapter 9) differs in that it is essentially a re-organisation, given that it is not a company that once declared bankrupt, dissolves and ceases operations. Therefore, the town is given a breather, another chance and hope, to proceed on, to bring itself back to revenue solidarity. Debt reorganisation is a high priority, while the contemplated liquidation of assets can be complex and subject to state laws regarding sovereignty.Bonds issued by towns and cities are also accorded different treatment to their bondholders, whereby the town may not make principal or interest payments, and the securities’ terms and conditions may be subject to possible restructuring under a plan of adjustment (lowered principal repayment).Bankruptcy is a tough blow on the reputation of any town, or city focused on fiscal propriety and needs to be avoided at all costs.Our engaging economic columnist of last week described the city of Detroit as devastated by overwhelming debt, lower population, lower tax collections, high operating expenses, unsatisfied creditor debts, and after many years of attempting to forestall the inevitable, nowhere to turn. While the outcome of Detroit’s reorganisation process will be in the news for some time, particular focus will be centered on the city’s municipal employee pension funds and the bondholders.The Pensions and benefits’ funds are some of the city’s largest liabilities contain, on average, the implied promise of defined benefit individual pensions of around $19,000 annually. It is a topic for concern as to whether these amounts may be significantly reduced as part of the restructuring.The pension amounts are small, and if not augmented with social security or a part-time job may severely impinge on any sort of even a simple retirement lifestyle, a problem that pensioners the world over are facing in increasing numbers. Thus, it was not so shocking to see an article in Bloomberg BusinessWeek July 18, 2013, ‘Silver Shoplifters Steal Bowls of Rice as Abe Cuts Welfare, Japan’s elderly go on a petty crime spree’ by Yoshiaki Nohara and Andy Sharp, on the increase in theft by elderly pensioners in Japan, trying to survive on limited savings that are ever shrinking as the Prime Minister Shinzo Abe seeks to control the country’s increasing deficit. According to the article, Japan’s seniors are feeling the impact and stealing to such an extent that “eight percent of those who went to prison in 2011 were over age 65”, necessitating the need for Japan to build new facilities to accommodate elderly prisoners. So often, elders must survive alone, any way they can.There is a corollary here; that I note was also picked up by Forbes in the last few days. Bermuda has to get our debt under control, too. We must generate additional revenue. We cannot financially support a cumbersome government bureaucracy, that is outsize in proportion to our needs and working population. We cannot afford defined benefit pension plans and highly generous health care programs into the future funded to the detriment of our young people. Our seniors, in many cases, are challenged to maintain their lifestyles, while the numbers of them continue to increase. We should not be discriminating against older employees who wish to continue to work in private profit-driven businesses when our Old Age Contributory pensions are woefully inadequate. We honestly need to think seriously of putting aside our differences to bring our society back to its full potential.Thursday’s announcement of a shared sacrifice government reduction package for public sector workers is a very positive first step towards financial recovery.Source: Bloomberg BusinessWeek, http://www.bloomberg.com/news/2013-07-15/silver-shoplifters-steal-rice-as-abe-cuts-welfare-to-trim-debt.htmlMartha Harris Myron JP CPA PFS CFP is a Bermudian journalist and a cross-border financial planning specialist providing offshore financial perspectives for international citizens living, working, crossing borders, and straddling ponds in the North Atlantic Quadrangle: United States, Canada, United Kingdom, Europe, and the Island of Bermuda, the premier international finance centre.President of Pondstraddler Life Consultancy.Publications, Presentations and Seminars. www.pondstraddler.com