Detroit Gets Green Light To Continue Bankruptcy Case

Judge rules the city is eligible for Chapter 9 protection

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A federal judge said Tuesday that Detroit can move forward with bankruptcy proceedings, opening the door for the beleaguered city to possibly shed billions in debt to unions, pension funds and other creditors.

The decision by U.S. Bankruptcy Court Judge Steven Rhodes does not resolve how Detroit’s considerable red ink will be consolidated, only that the city is eligible for Chapter 9 bankruptcy protection and can begin drafting a plan to restructure its debt.

“The city needs help,” Rhodes said in announcing his decisions, according to the Associated Press.

The city filed for bankruptcy July 18, in the largest municipal bankruptcy in American history. Detroit, after losing population for years, is weighed down by $18 billion in debt, but labor unions and other creditors have opposed the bankruptcy, concerned that it would give the city an out to cut previously guaranteed pensions to city workers.

Opponents of the bankruptcy had argued in court that the city’s state-appointment emergency manager, Kevyn Orr, did not negotiate in good faith with creditors to try to reach a solution before filing for bankruptcy, and that Michigan’s constitution protects pensions.

But Rhodes said Tuesday that even though the city inappropriately expedited negotiations, it would have been “impracticable” to carry on negotiations, and that the city acted in good faith when it filed for bankruptcy. He also said he will allow pension cuts in the bankruptcy filing as part of a larger equitable plan to adjust the city’s debt, the Detroit Free Press reports.

The decision is widely expected to be appealed, potentially delaying the fate of the city and its creditors.

Once the country’s fourth largest metropolis, with 1.8 million people in 1950, the Motor City has seen its population — and tax base — fall to 700,000, taking a toll on city services and the local economy.

5 comments
mary.waterton
mary.waterton

@ViableOp  

I agree. Hundreds of cities are likely to take this path in the next few years as debt deflation takes its toll.  This nation is drowning in debt and there is no way to postpone the consequences forever.