Three months of financial mediation between Stockton, CA and its creditors finally came to an end this week—without a solution. As a result, Stockton has become the largest U.S. City to seek bankruptcy protection.

City-Level Civil Mediation Attempts

According to California law, Stockton should have a balanced budget completed before July 1 of every year. This law applies to every other municipality in the state. The city had been meeting with creditors to work out a payment plan that would help it avoid a $26 million budget deficit for the next fiscal year.

Unfortunately, Stockton failed to come to an agreement with all of its creditors. That means that the city will be seeking Chapter 9 bankruptcy protection, which will allow it to put debt payments on hold while it restructures and raises money.

Mediation Wasn't entirely Unsuccessful

City Manager Bob Deis says that mediation attempts to prove fruitful to a degree: the city may reach an agreement with roughly a third of its creditors.

Stockton has been hit hard by the recession, particularly in the financial arena. It has dealt with the reduction in income by dramatic budget cuts, which included police personnel cuts by 25%, fire department employee cuts of 33%, and other city employee cuts of 40%.

Filing bankruptcy for tan entity the size of Stockton can be a long and expensive process. There is no word yet on whether or not the city will be allowed a special second mediation session with its creditors. Only one session, for a period of up to three months, is required by California law.