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If its plan fails, the California city could become the largest in the US to file for bankruptcy.
Stockton, Calif. is trying not to become the largest city in the US to file for bankruptcy.
The city late Tuesday voted to stop making payments to creditors and to enter mediation, the Los Angeles Times reported.
The agricultural and shipping hub about 80 miles from San Francisco is the first city to use a new California law that requires mediation to help untangle the finances of struggling municipalities.
While Stockton officials described their use of the law as a plan to avoid bankruptcy, the Times described the law as something more likely to slow bankruptcy proceedings. The mediation process is seen by many as a precursor to a bankruptcy filing.
"Dozens of residents attended Tuesday’s six-hour council meeting to oppose the vote to enter mediation, saying they feared it would push Stockton further into trouble," the Associated Press said.
Stockton is among the American cities most devastated by the burst of the housing bubble. It has faced mounting foreclosures, declining tax revenues and could soon be unable to pay its debts. The city is expecting to post a budget deficit of $8.7 million this year, AP said.
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Bill author Bob Wieckowski, a democratic lawmaker from Fremont and a bankruptcy attorney, told the Times the bill is designed to help cities avoid lawsuits if they do go into bankruptcy.
"No one knows what a garden-variety municipal bankruptcy looks like," he said. "This gets all the players in one room to put deals in place and admit that in a situation like this there are no winners, baby."
Wieckowski, however, suggested to Bloomberg News that the bill aims to discourage Chapter 9 bankruptcy filings.
Vallejo, a Bay Area neighbor of Stockton's, filed for bankruptcy in 2008 becoming the largest city in California to enter bankruptcy.
The Times noted Stockton has hired the attorney Vallejo used to represent it during its bankruptcy.
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