Judge Allows Detroit to Proceed in Bankruptcy

December 17, 2013

A federal judge has ruled that the City of Detroit is eligible to proceed in a rare Chapter 9 bankruptcy case, which will include modifying pensions for thousands of city workers and retirees. Creditors and pensioners had challenged Detroit’s eligibility to file bankruptcy, claiming that the city did not attempt to negotiate with its creditors in good faith prior to filing as required by statute.

Judge Steven Rhodes found that Detroit officials had not negotiated in good faith in the weeks before the bankruptcy filing, as required by the Bankruptcy Code. However, the Bankruptcy Code also states that the good faith requirement is met if the debtor “is unable to negotiate with creditors because such a negotiation is impracticable.” Rhodes said that the number of creditors (more than 100,000) and a wide array of competing interests probably made negotiating with creditors and pensioners “impossible.”

During the hearing Judge Rhodes wondered aloud why the bankruptcy had not happened years earlier. He also opined that pensions can be altered during a bankruptcy case just like any other contract because the Michigan Constitution does not offer bulletproof protection for employee benefits. However, Rhodes also indicated a desire for a measured approach when dealing with pension benefits.

Detroit is $18 billion in debt and any reorganization plan is expected to include reduced payments to creditors and a restructuring of pensions to an estimated 23,000 retirees and 9,000 workers. Rhodes promised that he would not “lightly or casually” approve cuts to pensions.

Speaking to a packed courtroom, Judge Rhodes said, “This once proud and prosperous city can’t pay its debts. It’s insolvent.” In formally granting Detroit permission to proceed with the largest public bankruptcy in U.S. history, Rhodes pointed out that Detroit has an opportunity for a better future, “At the same time, it also has an opportunity for a fresh start.”

The federal bankruptcy laws can help the City of Detroit get back on its feet, and it can help you too! If you are struggling financially, call an experienced bankruptcy attorney at Fears Nachawati and learn how the federal law can help you get a fresh start. Contact us at the office 1.866.705.7584 or send an email to fears@fnlawfirm.com.

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