The New Face of Bankruptcy: Public Employees

bankruptcy There was a time not so long ago when, if you worked for the government, you could depend on a steady paycheck and decent retirement -- you might not lead a lavish lifestyle, but you could keep a roof over your family's head, put shoes on their feet and food on the table. None of those things are givens any more, according to an attorney who specializes in bankruptcy. Michael Greiner says that he's seeing more public employees filing for Chapter 7 bankruptcy.

"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," says Greiner. "In the current fiscal crisis, that is changing." He's had so many inquiries about Chapter 7, that he's developed a blog to answer people's questions about it.

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 staffing costs:

  1. Governments now make employees pay more for benefits. It's not just health insurance that governments are now making their employees pay more for. Employees now often must pay toward retirement, life insurance and even the health care costs for their retirement. These are costs that were often entirely borne by the government.
  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, which is paid only by the government employees. In certain states, there are legal challenges to this approach, but this tactic is being used 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.

"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."

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