By MONICA DAVEY
Published: December 3, 2013
DETROIT — A federal judge is expected to rule Tuesday on whether Detroit is eligible for bankruptcy protection, a crucial step in the city’s effort to pay off part of its overwhelming debt and to begin rebuilding its vastly diminished city services.
The decision, which is to be issued by Judge Steven W. Rhodes of the United States Bankruptcy Court, is also a significant legal test for Detroit, which in July became the largest American city ever to seek bankruptcy protection.
If Detroit is ruled eligible to reorganize under court protection, lawyers for the city and its appointed emergency manager may move ahead in submitting a plan to pay off part of its debts and to start reinvesting in essential services. City officials have said such a plan could be filed before the end of the year, and that the city, once the nation’s fourth largest, might emerge from bankruptcy in 2014.
Detroit’s path forward will be far less clear if it is found ineligible to reorganize, a position favored by representatives of the city’s labor unions.
Many legal specialists and government officials say they expect Detroit will be found eligible for bankruptcy protection. Under the provisions of municipal bankruptcy, a city must be deemed insolvent, a standard that many bankruptcy specialists say Detroit, which is buried beneath $18 billion in debts, is likely to meet. In fact, Detroit’s filing marks the nation’s largest municipal bankruptcy ever in terms of the size of the debt.
But a city must also show that it has negotiated in “good faith” with its creditors or is unable to negotiate with them because such talks are impracticable. Some public sector unions and retirees, who object to the possibility that their pensions may be cut, say Detroit’s leaders never made an earnest effort to bargain, but rather intended to seek bankruptcy all along. Outside bankruptcy, the Michigan Constitution prohibits reducing pensions that public workers have already earned.
Whatever Judge Rhodes rules, the legal battles will be far from over. Any decision is likely to bring a number of appeals. If Detroit is found ineligible for bankruptcy protection, the city, which has already begun defaulting on some debt, is also likely to find a barrage of demands and lawsuits from its creditors.
While a legal determination that Detroit is so broke that it meets the standards for bankruptcy might seem an undesirable assessment for a major city that gave birth to the American auto industry, such court protection is seen by some as the city’s best hope for revival: a chance under court supervision to reduce its debts, restore essential city services, and lay out a course for starting over.
In July, an emergency manager assigned by the state to oversee Detroit filed for bankruptcy with approval from Gov. Rick Snyder, a Republican in his first term.
To some observing the city’s circumstances — annual operating deficits since 2008, a pattern of new borrowing to pay for old, a shrunken population and tax base, and diminished, undependable city services — there seemed no question that the situation was dire. A city of 1.8 million people in 1950, Detroit has fallen to a population of about 700,000, or the nation’s 18th largest city. The city is plagued by vacant buildings, darkened streetlights, and slow police response times.