On Thursday, July 18, 2013 the City of Detroit filed a rare petition seeking bankruptcy protection and the adjustment of debts under Chapter 9 of the United States Bankruptcy Code. Chapter 9 is only available for municipalities which want to declare bankruptcy. Detroit is the largest municipality filing in the United States with debts between $18-20 million.
However on July 19, an Ingram County judge ruled the bankruptcy was unconstitutional according to Michigan’s Constitution. The Constitution bars any action which threatens to cut the pension benefits of public employees. On July 24 the bankruptcy court issued a stay on the proceedings and set up a hearing on October 23 for people to object to the bankruptcy filing. Detroit’s bankruptcy plan is due, for now, on March 1, 2014.
Once bankruptcy proceedings eventually get under away, an automatic stay will be entered on most of Detroit’s bills. Only secured creditors, such as water and sewer bondholders, will have the right to seize the city’s assets if they are not paid. A stay will also be entered on all lawsuits against the city, so any further objections to cutting pension benefits will have to take place in the bankruptcy court.
On stipulation for Chapter 9 bankruptcy is the city must be insolvent, which means it is not paying its bills. Detroit’s manager stopped paying some bills prior to this filing, but ultimately the bankruptcy judge will determine if Detroit is eligible. If eligible, it is likely Detroit will try to reorganize itself. Reorganization could take years and could involve budget cuts, layoffs, consolidation, the sale of assets, and dramatically reducing city debts, including outstanding bonds and union contracts. Creditors will have a chance in the proceedings to voice their concerns over whatever plan Detroit proposes.