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The first test of California's new law on municipal bankruptcies may come in Stockton, whose city council is on the verge of seeking bankruptcy protection from its creditors.

Last year, the Legislature decreed in Assembly Bill 506 that local governments could file bankruptcy only after either declaring a fiscal emergency or participating in a "neutral evaluation process."

It was a modified version of legislation that public employees unions had sponsored to require local governments to gain state permission before filing bankruptcy, stemming from Vallejo's insolvency.

Stockton, which was hard-hit by the housing industry meltdown, is now contemplating bankruptcy, according to an article in the Stockton Record. If it happens, it would be the largest city bankruptcy in American history.

The Stockton City Council is expected to take the first step next week and, among other things, must decide which of the two options in the new law it would take.


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