Individual Americans are not the only ones feeling the pinch of the recent economic downturn. Cities throughout America are also trying to figure out how to make it work. Many cities, especially in California, are contemplating filing for bankruptcy as a form of debt relief.

Bankruptcy can prevent creditors from harassing the individual who filed, and is a way to create a plan to restructure debt to emerge from bankruptcy with a better financial outlook than before.

The city of Stockton has recently begun mediation with its creditors in its bankruptcy proceeding. Stockton filed for Chapter 9 bankruptcy in June, seeking protection from its creditors.

In bankruptcy, if the individual, city or business filing for protection does not have the resources or assets to cover all debts, the debt can be wiped out. This means that creditors can be out of luck on substantial accounts.

The court is currently trying to determine whether Stockton is deserving of the court protection granted in bankruptcy. Creditors of Stockton have until November 9 to file with the court that they have a debt owed by the city.

Stockton ended up in this position due mostly to the housing collapse in 2008. The city entered into some costly contracts, banking on a continuation of the booming housing economy before the crash. These costly contracts included medical coverage for retired employees and bond debt.

Stockton is not the only California city to file for bankruptcy protection, and will most likely not be the last. A similar bankruptcy case settled before the court granted protection in Mammoth Lakes, California. There, the city entered into a substantial contract with a developer before the economic downturn. The city and the developer agreed on a settlement, though the terms of the settlement remain confidential.

For many people in America right now, bankruptcy can be the best option in a bad financial situation.

Source: Yahoo News, "More talks for Stockton, creditors in city's bankruptcy case," Jim Christie, Aug. 23, 2012