The New Face of Bankruptcy: Public Employees

WARREN, Mich., June 7, 2011 /PRNewswire/ -- State and local governments facing financial pressures have turned to their employees to help balance their budgets. But now a prominent Bankruptcy attorney who is the founder of the website myeasy7.com is warning of an unexpected consequence: more Bankruptcies.

"Traditionally, public employees were not eligible for Chapter 7 Bankruptcy due to the fact that they had good salaries and typically didn't have to pay much toward their benefits," Attorney Michael Greiner said. "In the current fiscal crisis, that is changing."

Cuts in pay have been only part of the story. State and local government, school districts and other governmental entities facing financial pressures have resorted to a number of strategies to reduce their staffing costs:

1. Governments now make the employees pay more for their benefits: It's not just health insurance that governments are now making their employees pay more for. Employees now often must pay toward retirement benefits, life insurance, and even health care costs for their retirement. These are costs that were often entirely borne by the government employer.
2. Governments now make employees give back some of their salary in deductions: Certain government managers have required teachers and other employees to pay a certain percentage of their pay back into a fund to support the governmental entity. Greiner pointed out that this approach is in effect a tax to support the government paid only by the government employees. In certain states, there are legal challenges to this approach, but it is being followed in a number of places nevertheless.
3. Governments now put wage freezes on employees while requiring them to do more: This strategy has been used in the past but has become particularly prevalent of late. Teachers are managing larger classes. Police and Firefighters work more hours without overtime.

Government officials, particularly conservatives, have championed some of these approaches. But an unexpected consequence of these strategies could be more Bankruptcies among teachers, firefighters, police officers and other government employees. The Bankruptcy reform legislation passed with the support of President Bush in 2005 would have made most of these employees ineligible for Chapter 7 due to their high salaries. But most of these new deductions get applied against their salary, making many of them eligible for Chapter 7 Bankruptcy where they might not have been eligible in the past.

"I had a teacher come to me recently who has a very high salary and lives on her own," said Greiner. "In the past, she would not have been eligible for Chapter 7. But she hasn't received a pay raise in a number of years, and almost half her pay goes to deductions. As a result, once the deductions were factored in, she became eligible for Chapter 7 Bankruptcy. She will not be alone."

Greiner is the founder and President of the Financial Law Group, a Detroit-area law firm specializing in Bankruptcy. He has represented thousands of individuals, businesses and creditors in Bankruptcy. He is also the writer of the recently-published Bankruptcy 101: An Insider's Guide to Filing Chapter 7 Bankruptcy on your own without an Attorney, and he is the creator of the website myeasy7.com (www.myeasy7.com) which assists individuals in filing Chapter 7 Bankruptcy without an attorney. He blogs at www.myeasy7.com/blog.

SOURCE myeasy7.com