Detroit’s historic bankruptcy trial will soon be underway on Aug. 29, and the outcome of the upcoming court case will not only determine the future of Detroit’s restructuring plan, but will have a long-lasting impact on America as a whole in so far as what type of legal precedent it establishes for future cases.
Detroit was the largest Chapter 9 bankruptcy in history. At the height of its inability to balance the budget, the city was $18 billion in debt. The fallout of the bankruptcy has involved complicated restructuring of everything from city payroll practices, to the city’s social welfare spending.
While Detroit might be the largest bankruptcy on record, its situation was not all that unique: 33% of America’s top 60 largest cities also have the threat of bankruptcy looming over them. The U.S. in general often turns to bankruptcy as an option — over a million personal and business bankruptcies were filed in the U.S. in 2013. What Judge Rhodes decides in the upcoming case will in one way or another likely influence the path these cities take in trying to become financially solvent.
Bond insurer Syncora could potentially lose hundreds of millions of dollars if Detroit is allowed to stop paying back its creditors. Ernst & Young consultant Caroline Sallee has been hired as an expert opinion by the city; she says that Detroit’s revenues would decline significantly if it had to raise taxes in order to pay off creditors. Syncora says that her testimony is a “is a desperate, 13th-hour effort by the city to plug a gaping hole” in Detroit’s case.
Although it’s easy to see the creditors as the bad guy in this case, as Tony Sayegh points out for Fox News, the city is legally obligated to attempt to minimize creditor loss — yet it is, instead, neglecting those obligations, and is maintaining billions of dollars in assets such as valuable real estate, which could be liquidated.
“[Judge Rhodes] needs to support a deal that is fair to all creditors, gives Detroit its best chance to succeed, and creates sound legal precedent for future municipal bankruptcies,” writes Sayegh. In order to move forward with its debt-cutting plan, Detroit will have to convince Judge Rhodes that it is both fair and feasible — and whether that is true remains yet unanswered.