Detroit files for Chapter 9 bankruptcy

Posted By Kristen Butler,  |  Updated July 18, 2013 at 6:35 PM
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The City of Detroit filed for Chapter 9 bankruptcy protection in federal court Thursday afternoon, marking the largest municipal bankruptcy in U.S. history.

Detroit is billions of dollars in debt after decades of population flight, lost revenue and mismanagement.

The filing begins a 30- to 90-day period that will determine whether the city is eligible for Chapter 9 protection, and define how many claimants might compete for limited settlement resources.

Detroit emergency manager Kevyn Orr has been meeting with creditors, and had released a plan that would leave creditors with less than they were owed.

Orr had warned that a bankruptcy petition would come if negotiations didn't go anywhere. "At the end of the day, we have to have a city that can provide basic services to its 700,000 residents," said Orr’s spokesperson, Bill Nowling.

Earlier this week, the city’s two pension funds -- which have claims to $9.2 billion in unfunded pension and retiree healthcare -- filed suit in state court to prevent Orr from cutting benefits as part of a bankruptcy restructuring.

The pension funds and, in a separate lawsuit, employee groups, argue that Michigan Gov. Rick Snyder, who would have to sign off on a bankruptcy petition, cannot do so if the filings include plans to reduce pension benefits, because the state’s constitution explicitly protects public pensions.

The bankruptcy filing was made today to beat a Monday court hearing that could have blocked the process in the event of a ruling in favor of the employee groups. The filing immediately stays all court proceedings.

Detroit will be the largest city to file for bankruptcy, both in terms of population, 700,000 including 30,000 current and retired city workers, and debts totaling more than $18.5 billion.

Stockton, California held the previous record, at half the size of Detroit with $26 million in debt. The previous debt record went to Jefferson County, Alabama, when it filed for bankruptcy in 2011 owing $4 billion.

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