As you know the City of Detroit filed a Chapter 11 bankruptcy, and after a lengthy and expensive process, is emerging from Chapter 11, ostensibly with its finances in order and its future brighter. A recently reported interview with the now-retired bankruptcy judge who handled the bankruptcy suggests that in the years leading to its bankruptcy, Detroit’s city fathers fell victim to a common malady, namely desperation and denial, and that this led to expensive mistakes.
According reports of an interview given by Judge Steven Rhodes, the city made an expensive and ill-considered deal to try to fend off the pension default that ultimately was a major impetus to its bankruptcy filing. The suggestion is that the City would have been better off had it simply bit the bullet earlier.
This syndrome of denial and “kicking the can down the road” is, in my experience, all to common, and leads to desperate and ill-considered attempts to stop the inevitable bankruptcy.
A common example is the business owner who borrows money against her home (or from the IRS by not handing over employee withholding trust funds) to keep a failing business alive. To be sure, saving a viable business and carrying it through a temporary rough patch is not a bad thing. The problem is that too often, there has been no effort to find out what is causing the problems, and no effort to deal with those problems.
Another face of this is the refusal to even consider the option of bankruptcy as an alternative until quite late in the game. Sometimes by the time this is considered, the situation has gone from bad but cureable to desperate and incurable.
Our advice to business owners is to always consider all the options, and to do so earlier rather than later. An early bankruptcy might solve critical problems that will only get worse and save the business, whereas later matters have gotten out of hand, and the once-saveable business is doomed.
Individuals are just a guilty of this. I cannot count the number of times I have seen couples whose solution to mounting credit card debt caused by income that was not enough to cover their spending was to borrow against home equity or emptying retirement accounts. The underlying problem is still there, and like Detroit, they are just “kicking the can down the road”
The lesson of Detroit is that financial problems do not get solved unless one gets to the source. Short term solutions, such as borrowing more money to meet a cash flow deficit, just delays the inevitable and makes matters worse.
It is never too soon for people or businesses in financial trouble to engage in careful and broad based planning. All choices and options should be considered.