Now that Detroit has filed for bankruptcy, what is next for the beleaguered city? Under chapter 9 bankruptcy, a municipality is given protection from its creditors while the debt and its repayment is negotiated. Solutions include, reducing the amount owed, extending loan terms and refinancing the debt.
Detroit’s first hurdle in qualifying for chapter 9 is proving it is actually insolvent and that it has negotiated in good faith with its creditors. With over 18 billion dollars of debt and unfunded liabilities, the city’s insolvency seems readily apparent.
However, Detroit’s creditors continue to fight the bankruptcy. On Monday objections to the bankruptcy were filed with the court by dozens of Detroit’s creditors, including city retirees and city workers union. The American Federation of State, County and Municipal Employees accused Detroit of filing an “unconstitutional, unlawfully authorized Chapter 9 proceeding seeking the haven of bankruptcy to illegally attempt to slash pension and other post-employment benefit obligations and cram such reductions down the throats of current and former city employees.” The AFSCME also accused the city’s emergency manager, Kevyn Orr of not negotiating in good faith. U.S. Bankruptcy Judge Steven Rhodes, has set an October 23rd trial date to hear arguments on whether Detroit qualifies for bankruptcy or not. A spokesman for Orr said last week that objections were to be expected, but in the end the city will be shown to qualify.
Assuming the city does qualify, what happens next? Orr would then submit a plan to restructure the city’s finances. The creditors would then vote on the plan. If the plan fails to garner the support of a majority of the creditors, the court will most likely instruct the city to continue with the negotiations. If still unsuccessful, the judge can force the creditors to accept the plan even with only a minority accepting the terms.
Considering the number of creditors involved, the huge sums of money involved and the distance between the two sides, I think it’s safe to say that what’s next for Detroit is a long drawn out court battle.
Detroit’s downward spiral has happened over several
decades. Any solution is bound to take months if not years. Even so, the process offers Detroit a chance to restructure its finances and emerge from bankruptcy on a more stable and sustainable path.