Detroit BK: This is What Happens When People Can’t Mind Their Own Business

Photo by Karen DeCoster

Let’s cut right to the chase here: When a business goes bankrupt it’s usually understandable in the sense that markets, technologies, economies of scale, customer attitudes, competition, and other business dynamics change—often too radically or rapidly for a company to anticipate or keep up. Severe financial hardship is always a direct result. Bankruptcy actually serves two valuable functions: 1) stop creditors chasing bad assets with good money, and 2) repurpose valuable assets to profitable endeavors (that’s why it’s great when a failing airline goes BK—those fabulous assets in aircraft get used properly by another company). But, importantly, businesses don’t get to collect revenue from customers at the point of a gun.

Conversely, most of that doesn’t apply to municipalities; so a municipal bankruptcy always goes to egregious mismanagement, corruption, typical politics, kicking the can down the street, and all the rest of it. Most absurd of all? They get their revenues by force—at least until people and businesses just pack up and leave, which is at least part of Detroit’s problem. Just stop and think of the ridiculous nature of that. Governments can literally compel their so-called customers to pay up for their so-called services and nary a single one from sea to shining sea, at any level, can manage to operate in the black, or at little to no debt.

Contrast that with Apple Computer—a company that has to entice real customers to voluntarily pay for its genuine products and services in a highly competitive marketplace—having $140 Billion with a ‘B’ in spare cash laying around, projected to be $170B by the end of the year (and Microsoft with $70B, Google with $50B, and Samsung with $40B and growing rapidly). Contrast it further with the USA’s utterly stupid, antiquated corporate tax system that has the moron ’99 percenters’ believing it’s the lowest rates in the world, but in actuality, is now the highest in the industrialized world (Japan just lowered theirs, so US is now the highest). Not only that, but the profits US companies earn overseas, that get taxed overseas, cannot be brought into the US and invested in capital endeavors and jobs here without facing taxation again by the US. Accordingly, companies leave the money overseas because it’s cheaper to just borrow what they need here and pay interest!

Back to the subject, here’s the part I’m most interested in, from The New York Times:

The decision to go to court signaled a breakdown after weeks of tense negotiations, in which Mr. Orr had been trying to persuade creditors to accept pennies on the dollar and unions to accept cuts in benefits.

Getting creditors to “accept pennies on the dollar” was my business for 20 years, and from 1993-98, I did that exclusively for small-to-medium sized businesses. I was very successful at it precisely because it was an entirely private matter and everybody got to mind his or her own business. Such is nearly impossible to do in the realm of publicly traded companies or municipalities, because the whole thing is reversed: all business is everybody’s business and “transparency” is held to some ridiculous standard of idealism.

Ironically, the whole thing about bankruptcy is the public transparency of it, such that in the private sphere, you go from private negotiations and dealings to a completely transparent process…contrasted with the public realm, where you go from one transparent process to another, the later having enforcement teeth from the bench. I could write a super long post—or a book—about all the ins-&-outs of the whole BK process in the private sphere, how most creditors usually get nothing after the trustee has depleted most assets and taken them as fees, and so on. Instead, I’ll just tell you that in all that time and dozens of BKs by small-medium businesses I’ve witnessed, I have…

  • never seen one single Chapter 7 liquidation where creditors got a single penny.
  • never seen a single Chapter 11 reorganization be successful. They always eventually get converted to a Ch 7-liquidation once the trustee has managed to bleed the company dry and interfere with all efforts to market or produce a way out.
  • seen one single case where creditors got significant recovery in a liquidation (~25%). The business decided to shut down, voluntarily liquidate, and had an attorney divy it all up and send out checks to all creditors, for a few hundred in attorney fees.

For the sake of simplicity, I’ve not addressed the issue of secured debts. For small business, that’s usually things like real estate, fleet, capital equipment and office furniture and equipment and in those cases, the only security is the assets themselves. Once liquidated, the applicable deficiencies are just as unsecured as for any other creditor.

…Over the course of my business, I myself lost hundreds of thousands in earned fees. This typically happened upon further deterioration of the company, after workouts had been negotiated and could not ultimately be completed. Oh, well. It went with the territory.

In one single case that worked out differently, I had a client with about 30 employees who refurbished and updated end-of-lease computer workstations. They would then sell them, or re-lease through a leasing company partner. Owing to the business cycle, their undercapitalization, and the bank they factored invoices through having them by the balls due to a ‘kitchen-sink’ UCC-1 Financing Statement filing, they ended up with about a million in unsecured debt.

In spite of being aware of the success we were achieving with the debt, the bank essentially forced them (terms of the UCC-1) to take on a CPA firm as an on-site consultant that was billing about $500/hr 24/7. They were absolutely worthless. I had already settled a good portion of the entire portfolio (around 100 creditors or so) to an average of 20-25 cents on the dollar. I think my total fees were around $150K (they were paying net about 35-40 cents on the dollar, including fees) and I’d collected about $70K over time, leaving about $80K on the table (that essentially went to the absolutely worthless, ineffective CPA and his team of know-nothings—who had originally told me that what we were doing was impossible).

Anyway, the company filed 11, it went on for like two years, and when there was absolutely nothing left after all the trustee fees, converted to a 7. But, I had a personal guarantee from the principal owner of the corp and went after him for $80K. We settled in a 2-hr mediation for something like $12k in installments which he made good on (I always put my money where my mouth is—I settle too, when it makes financial sense). As a final twist, he came to me a few years later to take him on as an individual client after being financially devastated unsuccessfully trying to save his wife’s life from the ravages of a cancer. Those are the sorts of “deadbeat clients” we always dealt with.

Here’s the crux of the matter and why I quoted what I did above, from the NYT article: I could have never accomplished what I did in saving hundreds of small businesses and jobs over 20 years, getting tens of thousands of creditors anything from 10 cents on the dollar to payment in full under new terms, all depending on the individual situation, unless everyone was able to act according to their own interests and allowed to mind their own business—or at least be open to me persuading them to.

I can hardly imagine that was anything even close to Mr. Orr’s situation where everything is public and politicized, all in an environment where the veritable political raison d’etre is to divide people by race, gender, side of the tracks, etc. In other words, he had an impossible task.

In my world, though, where it’s achievable and often successful to negotiate workouts in lieu of BK, all communications are private and confidential, everyone negotiates to their own interests, everyone judges for themselves what it’s worth to them, everyone gets to mind their own business. For example, a small business guy who’s owed $2,000 is not going to be interested in $200. The two most common reasons:

  1. It’s not worth the pain in the ass factor to deal with the settlement paperwork.
  2. The moral vindication is worth more than $200.

So, you don’t even insult the guy with that kind of an offer. You start at 30% and settle at 40-50%. But what about the other vendor owed $30,000?

  1. 10-15% ($3-4K) is real money.
  2. Depending on his or her circumstances, his or her own business, he or she might really need $3,000-4,000 right now. He or she might value it—“I can get you a cashier’s check TODAY!“—far more than he or she values bad paper that says they’re entitled to $30,000 from a troubled company.
  3. It might not be available tomorrow, because all available funds are first come, first served.

This is the way you get the job done. The only way you get the job done. And incidentally, every deal I ever did was on the come. I got paid on results, either some percentage of the total debt settled, or a percentage of the amount saved the client. Accordingly, every client I ever worked for paid far less than owed on net, including my fees.

So, finally, owing to the foregoing, this BK is a good thing for Detroit and really the only way out. Detroit aficionado and longtime buddy Karen DeCoster puts it this way:

Interestingly, there are libertarian types here – locals – who are quietly celebrating the fact of bankruptcy. There. was. no. other. way. I am mindful of the phrase ‘be careful what you wish for,” but from a purely financial and ‘move forward’ perspective, this is the best case scenario. Some of my Detroit buds will not like me for the truth. I know you may be saying – where’s your substance? I’m just trying to make it on the tail end of the “firsters” club!

Karen also blogs at Detroit: From Rust to Riches where, among other things, she shows off her photographic prowess with many great pics of what was a great city and will be, again.

…To learn why I eventually shut down my company of 20 years, listen to the opening few minutes of my recent Latest in Paleo podcast with Angelo Coppola.

Memberships are $10 monthly, $20 quarterly, or $65 annually. The cost of two premium coffees per month. Every membership helps finance the travel to write, photo, and film from interesting places and share the experiences with you.


  1. TR on July 20, 2013 at 20:53

    “of what was a great city and will be, again.” Could you expand on the “will be, again”. How and Why.

    • Richard Nikoley on July 20, 2013 at 23:05


      Do you know what irritates me? It’s when I can’t even use an inspirational, hopeful sentence on some measure of confidence, counting on the amazingness of human animals without some wanker asking me to explain it on nuts & bolts like I’m some sexless robot.
      Feel me?

  2. TR on July 21, 2013 at 07:26

    Hmmm. Well dang. Short cut to the chase comments don’t always work well online. Been reading a lot lately on Detroit. Sifting through the ashes looking for a Phoenix. Hopeful, inspirational and confidence all good. My apologies.

  3. Ulfric Douglas on July 22, 2013 at 08:00

    How much money did the Detroit gubmint owe, for how long, and to whom?

  4. Contemplationist on July 22, 2013 at 11:48

    As long as the ‘democratic government of Detroit’ remains in charge (after the city manager cleans up I’m guessing), the environment won’t change. There is zero hope with the same institutional arrangement. It would require a ‘coup’ by the State Guv to dismiss the entire City of Detroit administration and replace it with some contractor or robots or just state bureaucrats to have any hope of recovery.

  5. SeanII on July 22, 2013 at 14:41


    For HBDers Detroit failed because of diversity and low IQs in the mix so expect the doom sayers.

    “From sea to shining sea” are there are cities doing well? Detroit has many positives going for it because the inhabitants got a head start in “You are on your own!” with a high number of urban agriculturists, community co-ops and generally the practice of living without total reliance on the authorities.

  6. Richard Nikoley on July 22, 2013 at 15:06


    I’d love it if the 80% “low IQ” Detroiters got a handle up and shoved it in everyone’s faces with attitude.

    I have zero doubt they could do it.

    Rule number 1: ignore the Messiah.

    I’m confident “the first black President” will be an enormous value. Just not in the way anyone intended.

  7. yerac on July 22, 2013 at 19:56

    fuckin dick

  8. SeanII on July 22, 2013 at 20:11


    The pillow talk probably went, “WE must do something about this!” “I’d send out the code.”

    I never think there is an evil cabal, up all night, scripting controls. Life is too random for that to run bug free.

    Do you think the emergence of some type of city state(s) can emerge out of this?

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