Detroit and Chapter 9 Bankruptcy

In light of Detroit’s recent Chapter 9 bankruptcy filing, we thought we would write about some of the unique aspects of Chapter 9 of the Bankruptcy Code.

 Chapter 9 is reserved for municipalities that cannot pay their debts.  ONLY municipalities can file under this Chapter.  This bankruptcy, unlike a Chapter 7 Bankruptcy, does not provide for liquidation of debt to payoff creditors.  Liquidation would presumably result in a violation of the 10th Amendment to the United States Constitution, which provides for State sovereignty over matters not delegated to the federal government. 

 Chapter 9 of the code provides protection for municipalities against creditors collecting debt.  The municipality will negotiate a way to restructure its debt through a reorganization of secured and unsecured debt.  Typically, this results in lower interest payments and reduced principal, to a point where it is feasible for the municipality to payoff its creditors. 

 Detroit had to file bankruptcy due to the surge of people leaving the city, and reduced taxes.  For example, in the 1950’s Detroit had 1.8M residents, and now only has approximately 700K residents.  Detroit has around $18.5 billion in debt and liabilities, according to the Detroit Free Press.

 A large part of this debt will be reduced through payment plans with reduced principal and interest rates.  However, the Honorable Judge assigned to the Bankruptcy case must approve the municipalities’ repayment plan before it can start paying back its creditors pursuant to the plan.      

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