Is Detroit Bankruptcy Bad News?


My hometown is in the news for being the biggest municipality (so far) to file Chapter 9 bankruptcy.  I thought this bankruptcy would happen, no other choice is out there.

The Detroit bankruptcy is not a surprise.  Am I happy about it?  No, but it is part of the solution.  Detroit filing bankruptcy is not the problem.

Just like I tell my clients, who uniformly tell me they do not want to file bankruptcy:  who does?  Nobody gets their diploma and says their dream is to be in a bankruptcy lawyer’s office in ten or twenty years.

The filing was precipitated by two of the pension boards suing to prevent the bankruptcy filing.  I have no idea how they thought they could do that.  But, they did not succeed.

Although their is local co-counsel, the attorney address for the filing lawyer is in Cleveland.

The judge has not been selected yet; the selection process is described in this excerpt from   the Eastern District of MichiganDistrict Court’s press release:

On Thursday, July 18, 2013 the City of Detroit filed a petition seeking bankruptcy protection and the adjustment of debts under chapter 9 of the United States Bankruptcy Code. The petition was filed in the United States Bankruptcy Court for the Eastern District of Michigan, Southern Division, and was assigned case number 13-53846.

The Chief Judge of the Court of Appeals for the Sixth Circuit will designate the bankruptcy judge to conduct the chapter 9 case pursuant to 11 U.S.C. §921(b). Upon receipt of the order of designation, the judge will be assigned to the City of Detroit bankruptcy case and the name of the assigned judge will be posted on the court’s web site. 

A billion dollars of assets sounds great.  Unless you also have 19 billion dollars of debts.  And over 100,000 creditors.

That must include all the past employees owed pension, healthcare, other benefits.

And these pensions are NOT covered by the federal government Pension Benefit Guaranty Board.

Other governments are quaking over the coming default on Detroit’s bonds.  This will increase the perceived risk of their bonds defaulting, raising interest rates, which is the cost of borrowing, which is what governments love to do because it helps the ruling elite spend more.  Even more than they can raise in taxes.

The money is not there to pay Detroit’s creditors.  Just like my clients who have  neither  enough assets to pay their debts nor enough income to pay the monthly bills as they come due.

Will Big Brother, the Feds, jump in?  Pick up the obligation on bankrupt Detroit’s bonds?  The political pressure will be intense to do so.  Like New York city in the 70s, or the Fannie and Freddie fiascos of recent vintage, is my city to big to fail?

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