Detroit City Gets Ruling for Bankruptcy

Tax Professionals' Resource
December 4, 2013 — 1,846 views  
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The long wait for Detroit is finally over as the city will move forward with the largest ever bankruptcy in the history of the United States. The judge passed the verdict saying that the city, which is crumbling financially, is eligible for shedding billions in debt.

Detroit Eligible for Bankruptcy

Judge Steven Rhodes was to rule whether to officially advance Chapter 9 Bankruptcy of the city. Objections from pension funds, unions and retirees were turned down by Rhodes. He announced that the city, which was once prosperous and proud, is in a situation where it cannot pay its debts. It has become insolvent and is eligible for bankruptcy. He added that the city also has a chance of making a fresh start.

His decision was to set the stage for the fight over the reduction of pensions, proposed cuts to creditors and potential asset sales. Emergency manager of Detroit, Kevyn Orr argued that the estimated amount of $18 billion in long term liabilities as well as debt needs to be reduced significantly.

However, decision on controversial cuts which include reduced pensions as well as sale of priced assets like Detroit Institute of Arts property will be taken later. The eligibility ruling came out after a contentious trial of nine days. During these nine days, the creditors and the city argued about the status of services and finances of Detroit.

Needs Protection to Look After Residents

The city argued that it needed bankruptcy protection to safeguard the interests of beleaguered residents who have been suffering with poor services like slow and almost nonexistent police response, erratic garbage pickup and darkened streetlights. These concerns were also mentioned during the trial by the judge.

Before filing of the case in July, close to 40 cents out of each dollar collected by the city were used for paying the debt. The city said that this figure could go up to 65 cents if the bankruptcy relief was not provided.

This decision taken by Rhodes is more or less of a critical milestone. He feels that pensions can be cut, just like any other contract. According to the city reports, the pension funds are presently short of approximately $3.5 billion.

A major part of the trial had already ended on November 8. Its focus was whether Orr’s group had ‘good faith’ discussions with the creditors much before the case was filed. This is one of the major steps for local government for being eligible for Chapter 9.

Tax Professionals' Resource