In Detroit, bankruptcy comes with a cost

As if Detroit doesn’t have enough money problems, now the cash-strapped city faces a huge bill from their bankruptcy lawyers. Which begs the question, is bankruptcy worth it? For example, Lehman Brother’s bankruptcy fees top $2 billion.  

“It can get very expensive,” says David Skeel, a bankruptcy expert. Skeel says plenty of bankruptcies cost millions of dollars these days. One reason? No one wants to speak up.

“Nobody that’s in the case wants to rat on somebody else and say, ‘Your fees are way too high,’” he says. Over the past ten years, Skeel says more companies have decided to fold rather than deal bankruptcy costs. 

 But there’s also more oversight. This summer the Department of Justice updated their guidelines to make bankruptcy fees more transparent. 

“I’ll call up the professional and say, “Tell me why you made this choice?” says Nancy Rapoport,  a law professor at the University of Las Vegas who has been a fee examiner. “Sometimes it’s a great choice. Sometimes we talk about a reduction in fees.”

Rapoport has seen stacks of fees taller than her. She’s five foot two. Oversight, she says, is essential.

“If reasonable fees aren’t being charged then something is wrong with the system,” she says.

Companies, and now cities, need clear eyes to see if bankruptcy is their best financial hope.