Motor City Meltdown: Long Road Ahead for Detroit’s Record Bankruptcy

The largest municipal-bankruptcy proceeding in U.S. history will take months to resolve, and the only short-term guarantee is more pain

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After decades of decline, the city of Detroit, once the cradle of the U.S. auto industry and middle-class urban prosperity, filed for bankruptcy on Thursday. The move not only begins the largest municipal-bankruptcy proceeding in U.S. history in terms of debt and population, but also culminates the stunning, slow-motion fall of an iconic American metropolis.

“The fiscal realities confronting Detroit have been ignored for too long,” Michigan Governor Rick Snyder said in a statement. “This is a difficult step, but the only viable option to address a problem that has been six decades in the making.”

The filing may be the Motor City’s best hope to mend its broken finances. But first it faces myriad legal hurdles as it tries to work out a resolution with its creditors. Four months after Snyder appointed emergency manager Kevin Orr, a bankruptcy lawyer, to take over Detroit’s fiscal affairs, the city is moving into a period of extreme uncertainty in which a federal court will decide its liability for billions of dollars in broken promises.

(MORE: Detroit: As the Governor Moves to Take Control, Residents Wonder What’s Next)

When he arrived on the job in late March, Orr took control of a city with an estimated $17 billion in long-term debts and a $327 million annual budget deficit. On July 12, the city announced it would stop making payments on about $2.5 billion in unsecured loans and asked some of its creditors — bond issuers, unions and pensioners — to forfeit as much as 90% of what the city owed them in order to avoid bankruptcy.

A primary reason anyone files for bankruptcy is to avoid lawsuits from creditors unwilling to take a large haircut. Detroit is no different. “It’s a very powerful protective remedy for people who owe money,” says John Pottow, a professor of bankruptcy and commercial law at the University of Michigan Law School. But the first proceedings will likely be a challenge from creditors whether the city is eligible to file.

The majority of bankruptcies in the U.S. fall under Chapter 11 reorganization or Chapter 7 liquidation, which apply to individuals and businesses. Chapter 9 bankruptcies, like the one Detroit filed for, allow for the reorganization of municipalities and differ significantly from other bankruptcies. “A Chapter 9 bankruptcy is still a bankruptcy,” Pottow says. “Although it doesn’t have all the rules of Chapter 11.” After filing with a bankruptcy court, a debtor usually files a plan of reorganization, which the court must approve. The debtor then reduces its debts by paying back a portion of what it owes.

That’s where things get complicated for municipalities. Under Chapter 11, if a company can’t restructure, the proceeding moves to Chapter 7 — the company is liquidated, and the sale of the company’s assets goes to pay off creditors. But under Chapter 9, a court can’t order liquidation. “Such a liquidation or dissolution would undoubtedly violate the Tenth Amendment to the Constitution and the reservation to the states of sovereignty over their internal affairs,” according to an explanation by the U.S. federal courts.

(MORE: Michigan: Its Own Worst Enemy)

While a court can’t order a city to sell its assets, the city can sell off the ones it chooses. But many of those assets, like police cars or school buses, are vital to the functions of a city. Others, as Orr found out in May, when he reportedly contemplated selling the Detroit Institute of Art’s collection, are considered sacrosanct by the public.

Another challenge of a Chapter 9 bankruptcy is that it is difficult to get out of contracts negotiated under a collective-bargaining agreement. Detroit will have to prove to the court that dramatically renegotiating is necessary for the survival of the city. According to figures released by Orr’s office, more than 40% of Detroit’s revenues were spent on so-called required payments such as pension checks, bond liabilities, health care benefits and other dues, which are estimated to grow to 65% of the city’s spending in the next four years.

Detroit’s filing may be historic, but it is not unprecedented. Dozens of cities and counties have filed for bankruptcy over the years, including several in the wake of the 2008 financial meltdown. In that year, Vallejo, Calif., filed for Chapter 9 because it couldn’t pay its pension obligations. Jefferson County, Ala., which includes Birmingham, filed in November 2011, after becoming mired in Wall Street’s problems. The largest city to file for bankruptcy before Detroit was Stockton, Calif., in June 2012. The city of 300,000 faced nearly $148 million in unfunded pension costs and more than $230 million in other debts.

But the Motor City’s $17 billion hole dwarfs those cases. “Certainly Detroit is something on the scale we’ve never seen before, both in terms of the quantity of the debt and also the concession they’re asking the creditors to take,” Pottow says. Orr’s reorganization plan will likely ask creditors to accept just 10% of what they are owed. Bankruptcy experts say there is no way to predict the outcome, but a large write-down is likely. In the Vallejo bankruptcy, creditors got between 5¢ and 20¢ on the dollar; in Jefferson County, some creditors got close to a third of what they were owed.

While bankruptcy is not a preferred way to restructure debts, it is often necessary for a fresh start. “The way Detroit is today can’t continue,” says Douglas Bernstein, a bankruptcy lawyer in Bloomfield Hills, Mich. “At some point you’ve got to realize you’ve hit rock bottom, you wipe out the debt that you can’t afford and change the processes that got you in this situation to begin with. You clean up your balance sheets and you should only get stronger as time goes on.”

But before Detroit can reorganize and get stronger, it faces months, and perhaps years of legal proceedings. More than 18 months after starting bankruptcy procedures, Jefferson County filed to end its bankruptcy later this year, proposing to write off a quarter of its debts. Under the plan, JPMorgan, which issued the county’s sewer warrants, will collect about 31% of what it’s owed.

(MORE: Millennials Making a Difference in Detroit)

Detroit’s misfortune probably means its creditors won’t get that much. “For legal scholars and interested parties it’s a fascinating process,” Bernstein says. “But the people here are going to feel some more pain.”

37 comments
AlgernonMoncrief
AlgernonMoncrief

Vallejo declared bankruptcy - retiree pension benefits were untouched. 

Detroit owns 60,000 works of art valued at $20 to 30 Billion, the city can afford to pay its debts.I am certain that Sothebys could liquidate this collection quite readily over the next two years, freeing up billions to meet municipal debt obligations.

"'They basically let us know that the collection was not off the table,' said museum director Graham Beal."

"Nowling conceded that while the city has not made any plans to sell assets, 'it is possible that the city's creditors could demand the city use its assets to settle its debts.'Beal maintains that DIA's collection is among the top six in the Western Hemisphere. While he could not specify a value, Beal said it would likely be in the billions of dollars."

"Laura Bartell, a bankruptcy law professor at Wayne State University in Detroit, said she believes Orr is just doing his job and that it would be irresponsible for him not to consider what assets Detroit has and what they are worth.'I don't think anyone argues that Detroit does not have the legal authority to sell something that Detroit owns. It's a question of whether Detroit will -- and if Detroit should,' said Bartell."

"Gov. Snyder has been working with Orr to try to ward off the city's bankruptcy and the sale of the DIA's art. However, Snyder admitted that he is not legally empowered to declare the collection hands-off."

http://www.cnn.com/2013/05/31/us/michigan-detroit-art

"If the city declares bankruptcy, the state-appointed emergency manager, Kevyn Orr, can sell off its assets to repay creditors—and artworks housed in the 128-year-old museum are not exempt. The city’s debt  about equals the worth of the museum’s holdings."

"Senate Majority Leader Randy Richardville recently introduced a bill that would protect the museum’s collection from being sold off during bankruptcy proceedings. Even if that legislation passes, it may not help the museum: Federal bankruptcy laws tend to trump state laws in court."

http://www.businessweek.com/articles/2013-06-04/in-bankruptcy-detroit-could-sell-off-its-art-collection

"A Metro Detroit bankruptcy expert already has indicated Schuette’s opinion may be for naught.

'Federal law trumps state law' in a Chapter 9 municipal bankruptcy, said Douglas Bernstein, a bankruptcy attorney at the Plunkett Cooney law firm in Bloomfield Hills, so DIA art would not be protected from sale to satisfy creditors."

http://www.detroitnews.com/article/20130613/METRO01/306130115

Earned, accrued, contracted public pension benefits (deferred compensation for work performed over decades) are also “treasured assets,” property protected by the Takings Clause. Works of art are relatively liquid assets of the city, and may very well be used to meet municipal debt obligations. The art could be sold to other public institutions where it would continue to be available to the public. Even if the art were to be sold to private individuals, much of it will eventually return to public institutions in coming decades.

Public pension benefits are part of a worker's earnings (deferred pension compensation.)Bonds are investments.The possibility of default is assumed by an investor in bonds, and the investor is compensated through the receipt of interest (coupon payments on the bonds.)These are two very different things.The Contract Clause of the U.S. Constitution requires payment of earned employee compensation when the employee has performed under the contract.

Support public pension contractual rights and the rule of law in the USA.Contribute at saveperacola.com, Friend Save Pera Cola on Facebook!

JasbirChawla
JasbirChawla

The earth can fulfil the desires of everybody but can not can not fulfil the desire of a greedy man told by M K Gandhi .

AnthonyMcMillan
AnthonyMcMillan

Detroit doesn't have any real assets outside of its art collection. And if they really did try to sell off school buses and police vehicles, from 2013 estimates, almost half of those vehicles are no longer working. It takes police over a hour to answer police calls now, its like Thunder Dome over there.

AmilcarAlen
AmilcarAlen

Porqué se cae un gigante? en cuanto tiempo? nadie pudo ver el "error de calculo"... simplemente se aceptaron artilugios de políticos y abogados? 


ChadPortenga
ChadPortenga

Detroit has finally run out of "other people's money."

During Detroit's industrial rise in the 20th Century, it was run by mostly Republican mayors. During the first 61 years of the 1900s, 47 of those years were Republican controlled, with the longest non-Republican span of 4 years being 1900-1904 and then the remaining Democratic mayors holding no more than 3 years in a row.

Since 1961, there have been NO Republican (or Independent) mayors elected. And, the decline has been steady for over 40 years. I'm not saying that the GOP is perfect and the Democrats are totally wrong, but when you look at the rise & fall of this once fantastic city, and who was behind the wheel, it become evident that the "freebies" can't continue forever.

List of Detroit Mayors:
http://en.wikipedia.org/wiki/List_of_mayors_of_Detroit,_Michigan

reallife
reallife

If Obama had a city it would look like Detroit...


curt3rd
curt3rd

“We refused to throw in the towel and do nothing. We refused to let Detroit go bankrupt."

Barack Obama  October of 2012

KentR
KentR

With all the abandoned property  Why cant a salvage company be developed to  dismantle  the buildings brick by brick and  use that to make money other than fill landfills that cost money   Many older factory buildings have thousands of board feet in hardwood lumber that could be converted to  furniture  hardwood flooring  or new structural members if carefully  deconstructed .. Thier are  millions of dollars  recovered that would be wasted  if just wrecked to cut the property value back to the land that  lies beneath.  Salvaged  Old glass windowpanes are valued  as is old mill-work   when cleaned of the lead paint  they  have even more value.  Old hardware  has value  even Doorknobs have value    But ,  for some progressives  its land fill fodder only  and is a huge green waste  to do so. with the pollutants  ending in ground water

disinterested3rdparty
disinterested3rdparty

Would 7 Billion help Detroit?  If the U.S. gave, not loaned, but gave them 7 Billion dollars, would that bail them out and restart the local economy?  If so, lets cancel those 7 Billion free dollars Obama just gave Africa, and send it to Detroit.  You know, Detroit?  An American city on the U.S. mainland?  Like, populated with Americans????  Detroit?  Not Kinshasa, Zaire??

ruraynor
ruraynor

I see a lot of opportunity in Detroit- all those old houses decaying, why not reclaim them for the bricks/fireplaces etc? Turn the uninhabited land into a wildlife park or urban farms. Build flagship eco-friendly housing with good insulation, wind turbines etc.

Sibir_Russia
Sibir_Russia

It's interesting.

The American Independence Day on July 4 in the newspaper "Washington Post"  published an article of a canadian historian Paul Pirie"The American Revolution was a flop"

The author, a follower of the British crown, argues that in the U.S. now live much worse than any other former colony of the British Empire.

fulankishwar
fulankishwar

This is definitely the effect of Iranian sanctions against the US. The US should stop their nuclear weapons program so that the sanctions might be eased.

Sibir_Russia
Sibir_Russia

The Federal Reserve Act was indeed passed on December 21, 1913. In finer detail, the chronology was as follows:

• December 22, 1913 – the US House of Representatives held a vote over the Federal Reserve Act.

• December 23, 1913 – the Act was passed by the US Senate.

• December 23, 1913 – an hour after the above, the legislation was enacted by US President W. Wilson.

"I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men." -Woodrow Wilson, after signing the Federal Reserve into existence

 Ron Paul staged his rally near the nation's World War I museum, asserting that the U.S. got off track about 100 years ago during the era of President Woodrow Wilson. Wilson led the nation through World War I and unsuccessfully advocated for the nation's involvement in a forerunner of the United Nations.

ShibuVarkey
ShibuVarkey

America should sell such aging and loss making assets abroad to INDIANS etc. Indians have a lot of unaccounted money stacked with them and doing nothing with it, fearing being caught by the Tax Departments.   By selling to the INDIANS, AMERICA can get rid of her DEBT, and in exchange, bring home a large no. of INVESTORS from abroad, who will pump in  a FRESH LOT of BLOOD, to RUN AMERICA in FULL STEAM.

mrbomb13
mrbomb13

: .....  (

Sad to see Detroit sink so far.  Shows what happens when companies decide to move production sites elsewhere.

For the 'Motor City,' that killed the local economy...just so the automakers could squeeze out some extra profit.

buffalo.barnes102
buffalo.barnes102

I imagine things are just hunky-dory in the General Motors' CEO's enclave. Putting all your eggs in one basket is never a good idea. I live in Hawaii and our dependence on tourism will likely put us in a crack if the economy goes down again.   

solardowork
solardowork

America’s LARGEST ECONOMIC ENGINE comes to an end and our leaders did almost nothing why?

 50 Potential Terrorist Acts Prevented and most all could have been done without violating over 300 million American's GOD given and OUR U.S. CONSTITUTION RIGHTS TO FREEDOM. How many aided or watched and did not a thing.

 AROUND THE WORLD MANY JOURNALIST HAVE GIVEN THEIR LIFE FOR TELLING THE WORLD THE TRUTH.

JUST ONE OF MANY MEXICO IS KILLING THE PRESS AND JOURNALIST

FOR EXPOSING THE LAUNDERING OF BILLIONS.

IS THIS NEXT TO HAPPEN IN THE USA?

("Press Freedom: Journalist in Mexico Killed for Reporting on Drug Cartels | Human Rights First") 

(Journalist around the world are killed for Reporting on and about the bad wicked corrupt leaders, that their bad deeds out number their good deeds. Only in government for the power and money.)

True Blooded Americans fly OLD GLORY the day might come soon that it will

be your last time.

("IRAN and NORTH KOREA WE ARE GOING TO TAKE DOWN THE USA obama too late i already did it.") This may soon not be so funny, as just a cartoon.)

Fort Hood the CIA and FBI Terrorism Task Force had been watching this man and

knew he was a Traitor to the USA and had done acts of TREASON. Why was he not

already in jail? 50 Potential Terrorist? Or aiding some?

What leader on earth would watch someone do acts of treason against his Nation

and not stop them on the first or second act little lone wait till they cold

heart ed Murdered many be for he put him in jail. USA Leaders if you are

lost and need a role model look to Canada.

Every 9-11 they are going to try.

September the wicked will always look to kill others Munich Germany 1972. 11 of

the ISRAELI Olympic Athletes were killed by the wicked. Special Forces sent Air

Mail to ten terrorist training PLO Bases in SYRIA and LEBANON in

response. 200 died 11 for 200 you do the math. The wicked are at war with all

that believe in Jesus Christ. Every year since they have tried or done acts of

Terror every September only the real slow in the head in government do not know,

to be ready each and every September. From the Religion of ? not Peace at a average

rate of 3 or more atrocities are committed worldwide each day all in the name

of ? islam the Religion the terrorist use.

Some will never Learn till it is too late.

The only group of wicked that kill close to this rate a year is the Drug Cartels.

Friends of Obama get away with anything right? Fort Hood Work place Bull

S... cover up.

In the hearts of every True American that has ever stepped foot on a United

Stated Military Base. These 13 Murdered Victims already have are Heart, and in our

minds We All Know They Have Clearly Earned the PURPLE HEART ALREADY.

Some of our leaders of this One Nation Under GOD need to be on trial for

TREASON.

We The People Live by are Lord GOD and "The U.S. CONSTITUTION"

NOT SOME SICK IN THE HEAD LEADERS.

"The U.S. CONSTITUTION ARTICLE III SECTION 3."

(AID OR COMFORT TO THE ENEMIES HOSTILE TO US)

(ANY ASSISTANCE RENDERED TO A FOREIGN STATE HOSTILE TO US)

(CONDUCT WHICH UNDERMINES THE UNITED STATES OF AMERICA OR ARE GOVERNMENT OR ARE

NATIONAL SECURITY)

Negotiating with terrorists act of TREASON.

GIVING ARE TAX MONEY TO OTHER COUNTRIES THAT SUPPORT TERRORIST OR TERRORIST

GROUPS ACT OF TREASON.

Many U.S. Department stores and large store chain's closings Nation Wide, this

year 2013.

Taking down are Military by WEAKEN MILITARY READINESS YET KEEPS SENDING MANY

MILLIONS OF OUR TAX MONEY TO OTHER COUNTRIES.

THIS IS OBAMA'S PLAN FOR JOBS WORKING AS HE PLANED.

MASSIVE TAX ON ALL EMPLOYERS PUTTING MILLIONS OUT OF WORK.

MANY MORE EMPLOYERS CUT FULL TIMERS TO PART TIME.

THE ONCE LARGEST ECONOMIC ENGINE IN THE WORLD

MOTOR CITY USA SHUTDOWN

(CONDUCT WHICH UNDERMINES THE UNITED STATES OF AMERICA OR ARE GOVERNMENT OR ARE NATIONAL SECURITY)

What Part of this did

all Americans let anyone cut out of our hearts or are (U.S. CONSTITUTION) "The U.S. CONSTITUTION ARTICLE III SECTION 3."

MORE THEN 50 MILLION AMERICANS OUT OF WORK OR ON FOOD AID THIS YEAR 2013. AND SOME

SO CALLED U.S. LEADERS OF WHAT THE WICKED ARE GOING TO KEEP SENDING YOUR TAXES OUT OF THE COUNTRY?

Why to keep taking a piece of the pie for them self's. Too many of these so called leaders went

into office with little to nothing and leave with millions, and they think that all America is that stupid.

They must be working more for them self then for GOD and Country.

Americans the next time you vote use a Black Pen not a pencil may be your

vote will count.

Leaders that put pencils in the voting

poll-booths need to be in jail. If they will not safe guard America who

will? Pencils to vote with and the wicked call this safeguarding your

vote. Anything that can be changed or tampered with is NOT to be used in

a voting place ever this was taught to all board of elections back when

i was a Judge. Back then many a democrat did wicked things.

Responsible

for the fall of the second most powerful man in the United States of America

Dan Rostenkowski, Democrat-Illinois

Democrat

controlled and run cities are some of the highest crime places in this

country. This is sad for all that live in and around them. You can not

work for satan and GOD at the same time.

(" When Injustice Becomes Law Rebellion Becomes Duty " THOMAS
JEFFERSON ).

("United We Will Always Stand in GOD We Trust"

George Washington and Johann Paul Schott 12/24/1776. 3:45AM)

("In GOD We Trust")

The United States of America’s Motto July 30, 1956.

King David’s Motto 3,000 years ago.

Soon all the World will Pray to Our Lord GOD and Savior Jesus Christ.

"United We Will Always Stand in Our Lord GOD and Savior Jesus Christ We
Trust"

True Americans

True Patriots

GOD Bless

May are Lord and Savior Jesus Christ

Guide and Watch over us all.

The Lord's Little Helper

Paul Felix Schott

SactoMan81
SactoMan81

In the end, Detroit's over-reliance on one industry--the automobile industry--doomed that city. The state of Michigan should have declared the entire Detroit metro area one gigantic enterprise zone, which would have given substantial incentives to bring diverse new industries into the Detroit area.

Say what you want about Chicago, but Chicago--being the biggest crossroads of rail transport in the USA and still have many factories functioning within 50 miles of the city--will unlikely end up being like Detroit. Indeed, if you don't mind the few months of bad winter weather, Chicago is actually an amazing town to live in with a very diverse cultural base.

KaraSpencer
KaraSpencer

This is not the whole story of Detroit or even the most important story. It would be nice if the media would also talk about the forward progress of businesses and individual communities that continues to happen. The solutions to Detroit’s challenges are being implemented by the people everyday.


It's also important to recognize the hypocrisy of state leaders who talk about municipal financial stress knowing that the state has slashed $6 billion from revenue sharing in the last decade.

AnthonyMcMillan
AnthonyMcMillan

@ChadPortenga: Detroit went broke because all high paying jobs fled the city, period. If I follow your line of reasoning, the national deficit doubled under President Bush and has ran in deficits for almost all republican presidents, elected over the last half of a century. The only thing the right does is cut off funding for the poor and give it to their corporate donors, its laughable you are blaming the democrats, their not any worse then the right and in most cases better.

Sibir_Russia
Sibir_Russia

@ShibuVarkey 

In 1982, the United States ' national debt amounted to 1 trillion dollars - is rising for 60 years.
in 2008, When Barack Obama is elected President., the financial crisis began. No, it's not the fault Barack Obama laureat of the Nobel Peace Prize.    United States ' national debt then amounted to 10.5 trillion dollars. By the end of 2016 national debt has doubled to 22 trillion dollars. This  diagnosed.  
United States debt is growing too fast.  There is such an ancient Indian legend-"Legend of the chess board"
http://www.youtube.com/watch?v=t3d0Y-JpRRg

BillyWeems2
BillyWeems2

@ShibuVarkey I'd love to see the US allow more educated Indians and east Asians into the country. And in a few years when Europe starts to collapse I'd love to see us allow their educated, hard working people in as well. What we don't need is more unskilled workers, but we can always use hard working educated people.

mrbomb13
mrbomb13

@ShibuVarkey 

America has $16 trillion in debt.  It would take a lot more than revenues from asset sales to dig out of that hole.

eagle11772
eagle11772

@SactoMan81 Chicago's BIG PROBLEM tho is CRIME.  It has one of the HIGHEST crime rates in the U.S., AND the HIGHEST homicide rate, nearly QUADRUPLE that of New York's homicide rate.  MOST of the homicides ar black-on-black crimes, and The Obamanaic, and his former chief of staff, now-Mayor Rahm Emmanuel, DO NOTHING !

eagle11772
eagle11772

@KaraSpencer It might be cheaper to move every inhabitant of Detroit OUT of the city to other places in the U.S., raze Detroit, and then start all over (like what they should do to Russia).

Sibir_Russia
Sibir_Russia

@mbking01@fulankishwar 

The United States imposed unilateral sanctions against Iran in defiance of the UN, to punish countrys that violate U.S. sanctions.

After the introduction of sanctions Iran began actively buying gold to use it in international trade. Turkey has become a major trading partner of Iran in gold, ahead of Germany.

 "We're destroying the greedy hands of Obama and able to circumvent the sanctions," said Rahimi local journalists.

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