The city of Stockton, located in Nothern California recently took the first step towards filing for bankruptcy for the city. The Stockton City Council voted to being mediation with creditors, a requirement before a city can file for bankruptcy. Under California law, local government agencies tmust undergo mediation or hold a public hearing and declare a fiscal emergency before filing for bankruptcy.
Stockton, a city with a population around 290,000 would be the largest city to ever file for bankruptcy. Stockton was hit hard by the recent mortgage crisis. The city has the second highest rate of foreclosure in the nation. The foreclosure crisis caused a large loss in property taxes and other fees. The city is estimated to have a budget deficit of about $15 million, making it unable to pay its debts.
Local government agencies can file for bankruptcy under Chapter 9 of the bankruptcy code. Filing for bankruptcy will allow the city to break its existing contracts and reorganize its debts.