On Tuesday, Federal Bankruptcy Judge Stephen Rhodes determined that the City of Detroit is eligible for Chapter 9 bankruptcy, ushering in a legal process that could have landmark decision written all over it. The city, with billions of dollars in outstanding debt owed, simply does not have the means to pay its creditors and is for all intents and purposes, insolvent. Judge Rhodes issued this decision over the fervent objections of union and pension creditors, who argue that this will almost certainly lead to cuts in the obligations that Detroit will owe to unfunded pensions.
The primary issue leading up to the decision was whether Detroit had negotiated with its creditors in good faith. While the judge did not overtly say they didn't, he almost hinted at the fact that it doesn't have such a large bearing on this case because of the vast amount of Detroit's creditors. What matters, in a practical sense, is that Detroit needs bankruptcy.
The city, with a population of over 700,000, faces tens of thousands of vacant buildings, has over half of the city's street lights blackened, and has horribly slow police response times. Their billions in outstanding debt have led the city into a precipice it clearly needed bankruptcy to get out of. Now, with the judge's ruling and go ahead, they finally have the freedom to negotiate and propose a plan to the court to help the formerly great city recover. Judge Rhodes, and all the parties involved, certainly still have their work cut out for them, but for now, its a step in the right direction for Detroit, and bankruptcy analysts everywhere.