Detroit Files for Chapter 9 Bankruptcy

In a major, potentially precedent setting move, the City of Detroit filed for Bankruptcy protection under Chapter 9 of the Bankruptcy Code yesterday afternoon. Upon the filing, Detroit becomes the largest municipality to file Chapter 9 in United States history. Much like the Stockton Chapter 9 filing earlier this year, this is a move that could potentially see precedent set for other struggling cities and municipal entities across the country.

Detroit lists somewhere in the neighborhood of $18 billion in debt. A substantial portion of this debt is in pension plans that the City owes on. These pension guaranties had filed suit against Detroit to prevent potential cuts to benefits that the City was planning in order to save themselves from having to file. It will take wrangling and negotiation to find a solution that fits both Detroit and the guaranties.

There are so many aspects to the case that have potential political, demographic, and economic factors that will most likely be extrapolated over the following months that it takes to administer the case. The filing indicated several thousand dangerous, vacant structures that will need to be dealt with as an expense and as a necessity. As the letter authorizing such a filing from Michigan's Governor indicates, the City must be able to reach a level again where it can sustain both its creditors and its citizens. As of this point, it is unable to do so.

It is still in the very preliminary stages of what could be a long bankruptcy process. Detroit is a major American city that has seen its population dwindle in the face of economic despair, yet still has the heart of the American auto industry driving its economic engine as a potential asset to help the reorganization. Whatever the case, there is going to be plenty of attention on this bankruptcy as it could help define how Chapter 9 is filed in the future.