Bankruptcy Ignites Controversy in Detroit

Bankruptcy Ignites Controversy in Detroit

Without an adequate tax base, the city of Detroit has been unable to meet its debt obligations. This in turn, has led the once mighty city all the way to the United States Bankruptcy courts. At one time, in the 1950s, Detroit boasted a population of around 2 million people. Automobile industry giants like Chevrolet, Ford, and Chrysler and their subsidiaries were the main employment attraction for the residents of the city and this allowed for an adequate amount of municipal income to guarantee that the city would be able to afford its financial responsibilities. Many of the major employers resided within a ten mile radius of the city and this helped ensure that residents and their needs were reasonably addressed.

But after these companies began to retract and relocate, the residents soon followed and now after years of job decline, industry relocation, and a diminished population, the city is left with an approximately 20 billion dollar debt load. Their obvious solution to the insurmountable liability was bankrupting the city and according to Governor Rick Snyder, in a letter approving the bankruptcy, “Only one feasible path offers a way out.”

Bankruptcy… after the state hired a bankruptcy attorney to help stem the financial hemorrhaging, and after failed negotiations with creditors, pension entities and unions to settle at a steep discount—less than 10 cents on the dollar in some cases—the city and the state determined that the best course of remedy would be a Chapter 9 filing to help recover the city’s financial standing. If it is approved, the assets of Detroit, the museums, possibly even the zoo, could be put up for auction to help settle the debts.

Although neither the courts nor creditors can force them to sell assets, it might be a last ditch option after raising taxes and cutting services such as garbage, recreation, and the like. And it could be up to a year or more before any resolutions are arrived at as the proceedings, the negotiations, and the settlements drag on through a myriad of systems and regulations. Many pensioners are in jeopardy of losing their incomes as a Chapter 9 filing carries with it a provision called ‘an automatic stay’ that disallows the collection activities against Detroit and its assets after the filing.

This protects the city from any and all creditors seeking payment of debts including pensions.

Written By: Daniel Dreier

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