Detroit Eligible for Chapter 9 Bankruptcy

Detroit Eligible for Chapter 9 Bankruptcy - Quicken Loans Zing Blog

December 3, 2013 marked a monumental day for the city of Detroit and many other cities in financial troubles across the United States. U.S. Bankruptcy Judge Steven Rhodes ruled that Detroit’s claim for Chapter 9 bankruptcy protection was legitimate and will stand, alleviating the city of $18 billion in debt.

In a verbal summary of a 140 page written opinion from Rhodes, he carefully explained the constitutionality of the ruling and declaring an emergency manager amongst other things. Nathan Bomey of the Detroit Free Press live blogged the entire reading, noting Judge Rhodes started with a bit of a history lesson on how Detroit got to where it was. Some startling statistics about the struggle Detroit has been in were also read by Judge Rhodes:

  • “If the city would not have deferred these payments it would have run out of cash by June 30 of 2013…”
  • Although unions dispute it, the city’s estimate of unfunded pension obligations is at $3.5 billion.
  • “The number of employed Detroit residents fell from 353,000 in 200 to 280,000 in 2012”

All of this teased the ruling that was read/expected of Rhodes: It was constitutional for the city of Detroit to file for bankruptcy, making it eligible for the largest municipal bankruptcy in the history of the country. Rhodes stated “The city cannot legally increase its tax revenues nor can it further reduce its expenses without further endangering health and safety.” He went on to add legitimacy to Detroit’s emergency manager, Kevin Orr, and giving kudos to Governor Rick Snyder for not complicating the bankruptcy by adding a contingency plan to it.

A big hurdle in making Detroit eligible for the bankruptcy was proving that the city had negotiated in good faith when filing for Chapter 9. Rhodes argued that it was impossible for the city to do so because the city’s budget was so dire, leveling the situation.

Much of the controversy surrounding the day involved Rhodes’ biggest announcement: pensions can be cut if the cuts are presented in a fair and equitable way. This was an unwelcome shock to Detroit’s firefighters, policemen and public workers, but it is now up to emergency manager Orr to determine where/how Detroit will make these massive financial decisions.

Some viewed Rhodes’ decision to hold a hearing to discuss his verdict as an unusual choice, but it made sense considering it’s a monumental case that can set precedence for cities filing for bankruptcy in the future. It’s also likely the verdict was publicly stated to help refute any appeals that may follow, but they’re still likely to follow given the pension announcement.

Rhodes said the bankruptcy of Detroit was a “forgone conclusion,” and the city should have filed years earlier. What’s your take on this historic bankruptcy? Please comment below with your thoughts.

 

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