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Detroit Officially Bankrupt


It’s official: the city of Detroit is bankrupt. Detroit had been on the verge of bankruptcy for several year, and though steps were taken for the city to try to make a recovery, these efforts have failed.

Detroit filed for Chapter 9 bankruptcy protection in federal court Thursday, making it the largest city in U.S. history to do so. Detroit is billions of dollars in debt, and the city has suffered under decades of mismanagement, population flight, and tax revenue loss. They are now seeking a bail-out from the federal government.

Detroit has filed Chapter 9 bankruptcy protection — will they be eligible for protection and government money?

Detroit won’t know until the conclusion of a 30- to 90-day period if they are officially eligible to receive Chapter 9 bankruptcy protection. Part of the period of time will be spent determining and defining how many claimants might compete for the limited settlement resources that Detroit has to offer.

Detroit wants protection from creditors and unions who are seeking to renegotiate $18.5 billion in debt and other liabilities.

According to Michigan Governor Rick Snyder:

The fiscal realities confronting Detroit have been ignored for too long. I’m making this tough decision so the people of Detroit will have the basic services they deserve and so we can start to put Detroit on a solid financial footing that will allow it to grow and prosper in the future. This is a difficult step, but the only viable option to address a problem that has been six decades in the making.”

In June, Detroit Emergency Manager Kevyn Orr released a plan to restructure the city’s debt and obligations that would leave many creditors with much less than they are owed. Orr has consistently warned that if negotiations hit an impasse, he would move quickly to seek bankruptcy protection.

That’s exactly what Snyder did when he signed off on the filing in a letter attached to court documents filed Thursday in U.S. Bankruptcy Court in the Eastern District of Michigan.

Governor Rick Snyder, in the letter granting his state-required approval, said that bankruptcy finally became the only viable option for Detroit:

It is clear that the financial emergency in Detroit cannot be successfully addressed outside of such a filing, and it is the only reasonable alternative that is available. In other words, the City’s financial emergency cannot be satisfactorily rectified in a reasonable period of time absent this filing.

I have reached the conclusion that this step is necessary after a thorough review of all the available alternatives, and I authorize this necessary step as a last resort to return this great City to financial and civic health for its residents and taxpayers. This decision comes in the wake of 60 years of decline for the city, a period in which reality was often ignored.”

Detroit’s two pension funds (which have claims to $9.2 billion in unfunded pension and retiree health care liabilities) this week filed suit in state court to prevent Orr from slashing retiree benefits as part of a bankruptcy restructuring.

According to Theodore Orson, an attorney who served as receiver for the City of Central Falls, R.I., when it filed for bankruptcy:

This changes the ballgame in this country on how Chapter 9’s will be viewed. Detroit is a city we all know about and we all care about. It’s where our cars came from. The country’s eyes will be looking at Detroit.”

Since the 10th Amendment to the U.S. Constitution protects the states from federal interference, a U.S. bankruptcy judge cannot improperly interfere with the city’s daily operations. According to bankruptcy experts, that means the judge will have to defer to Orr’s recommendations in many instances.

The eyes of the entire country, and the world, will be watching how Detroit handles their bankruptcy situation.

Written by: Douglas Cobb

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