U.S. Bankruptcy Judge Steven Rhodes' decision sets the stage for a battle over pension reductions, the potential sale of assets and proposed cuts to financial creditors. Detroit emergency manager Kevyn Orr argues that an estimated $18 billion in debt and long-term liabilities must be significantly reduced to help the city attack pervasive blight and violent crime.
But that could mean controversial cuts — including reduced pensions and the sale of prized assets such as Detroit Institute of Arts property — that will be decided at a later date.
The eligibility ruling happens first. The decision comes after a contentious nine-day trial in which the city and creditors argued about the state of Detroit's finances and services.
Rhodes will discuss the ruling verbally in a 10 a.m. EST hearing at a downtown Detroit courthouse and will issue a written opinion later in the day.
Question: What are the main criteria to be eligible for Chapter 9 bankruptcy?
Answer: Detroit must obtain the state's authorization, prove it is insolvent and show it bargained "in good faith" or that it is "impracticable" to do so.
Q: What are the chances Rhodes rejects the petition?
A: Very low. Experts say Rhodes will allow the filing because the city government is in disarray and must shore up its finances to improve public safety. But during the eligibility trial, which concluded Nov. 8, creditors exposed several holes in the city's case — and there's a good chance Rhodes will allow the bankruptcy while also scolding the city for not negotiating in good faith.
Q: What happens if the city is ruled eligible?
A: Emergency manager Kevyn Orr would proceed with plans to propose a massive restructuring plan, called a "plan of adjustment," by the end of the month. The plan would include offers to bondholders, retirees and unions and likely would also include the proposed sale of assets, such as DIA property and the city's water and sewer department. Several creditors have already signaled they plan to appeal.
Q: What happens if the bankruptcy is dismissed?
A: The city, which could also appeal, would try to negotiate concessions with its creditors. But without the court's protection from creditors, the city would be flooded with lawsuits from creditors that have not been paid in recent months. This could result in the city quickly re-filing for bankruptcy. Orr would still serve as the city's emergency manager.
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