Featured News 2013 Judge Rules that Detroit Qualifies for Bankruptcy Protection

Judge Rules that Detroit Qualifies for Bankruptcy Protection

Tuesday, December 3, a federal judge ruled that Detroit is eligible for Chapter 9 bankruptcy protection. This means that the largest municipal bankruptcy case in the United State's history can continue. What will this mean for the city and its cultural assets? What about its pensions? Read on to learn about this developing story.

This largest ever municipal bankruptcy in this country's history was initiated because Detroit was straining under $18.5 billion of debts. The city also has more than 100,000 creditors. While it is likely no surprise that the city was deemed insolvent, what is unwelcomed by many is Judge Steven Rhodes' ruling that pensions can be diminished as a measure to get rid of debt, though he did qualify this ruling by saying that the cuts had to be reasonable. Rhodes would have to sign off on any proposals to cut pensions. To date, pensions have never been forcibly cut in a municipal bankruptcy.

As for the contention that the city did not negotiate in good faith with unions and pension funds, Rhode did agree that the city certainly rushed the bargaining. Unions asserted that the state's constitution guaranteed that pensions were thoroughly protected, but Rhodes decided that federal bankruptcy law overruled the state's law. He said that negotiating in good faith was "impracticable", simply not feasible give the city's financial woes. Rhodes decided that the bankruptcy case could not be dismissed because of these negotiations.

What is next for Detroit's bankruptcy? Many creditors have already indicated that they want to appeal this ruling. Then emergency manage Kevyn Orr would need to craft a restructuring plan, and then either he or the city would have to choose which assets to liquidate (something that creditors cannot do, nor can a judge). This could jeopardize the collection at the Detroit Institute of Arts, though Rhodes did voice hesitations about it being reasonable to liquidate these invaluable assets.

All works contained in the DIA are being appraised, a job which is expected to be finished within a couple of weeks. A preliminary appraisal of 496 works valued them at less than $2 billion, which is considerably less than expected. Rhodes said that while the sale of this art could stave off some of the debt in the short-term, its value for the city's future would far outweigh the limited amount of debt it could eliminate. It would only be delaying the city's demise, not actually restructuring a sustainable budget. The museum has pledged to initiate a legal battle to shield its artworks from the bankruptcy if it has to. The county's voters had also voted in a measure that could protect the museum's collection. Back in 2012, voters agreed to a 10-year increase in property taxes, which was meant to yield $23 million annually, enough to protect the museum.

Then there are city workers ready to launch legal battle before they see their pensions shrink. One union, the American Federation of State, County & Municipal Employees, already voiced its decision to appeal Rhode's ruling. Otherwise, Orr's plan to cut out $9 billion of the city's $11.5 billion in unsecured debt would mean that pensions would greatly decrease. Health coverage for retired workers would also decline significantly, and investors who hold the city's debt would barely get any return on their money.

Despite the conflicts and uncertainty that will ensue, with bankruptcy underway, this could mean a stronger future for the city of Detroit, a way out of debt to financial solvency. And while of course there is a great disparity between a city's bankruptcy and that of an individual, bankruptcy holds that same opportunity to anyone eligible for these protections. If you are in a great deal of debt, you can use this directory to find a local legal expert who can help explain your best path to a better financial future.

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