In creditors’ rights mediation, the creditor is able to make an attempt to work with the debtor to receive some form of payment toward a debt that is owed without going through the judicial system.  However, in some cases, particularly when the debtor is in over his/her head, these mediation proceedings might only result in pushing the debtor closer toward bankruptcy.

A good case in point is Stockton.  Last year, Stockton, California became the largest American city to ever declare bankruptcy.  This filing came on the heels of heated mediation attempts between Stockton’s creditors and the city’s officials to restructure hundreds of millions in debt—mediation that was unsuccessful due to the realization that there was no way to resolve the vast amount of debt the city owed without filing bankruptcy.

Bob Deis, the city manager for the City of Stockton, stated, “Unfortunately we have no comprehensive set of agreements with our creditors that would eliminate the deficit and avoid insolvency.  We think Chapter 9 protection is the only choice left.  If we get any agreements, those will be honored in Chapter 9.”

In a 6-1 vote, the City Council approved a bankruptcy budget to deal with 2013’s estimated $26 million dollar deficit.  Included in the budget were provisions to reduce payments for retiree medical benefits and suspend debt payments.

The deficit and resulting bankruptcy came on the heels of a hard-hit housing market crash that was difficult for Stockton to recover from, despite the city’s efforts through cutting wages and medical benefits, laying off one-fourth of its police officers, one-third of its fire staff, and 40 percent of the rest of its employees.

While Stockton’s mediation negotiations with its creditors had been underway from March until June due to AB 506, a recent California law that requires mediation before a city can file bankruptcy, there was simply no leverage room.  The city had done everything in its power to cut it expenses, short of stopping necessary public services, however the Recession that hit in 2008 had already done its irreparable damage.  In addition to the city-wide layoffs of public employees, Stockton has dealt with a nearly 20 percent unemployment rate and has experienced one of the highest foreclosure rates in the country.  Wells Fargo, one of its lenders, just repossessed some city parking lots and the future city hall.