U.S. Bankruptcy Court Judge Steven W. Rhodes ruled Tuesday that the city of Detroit is eligible for bankruptcy protection. With today’s ruling Detroit became the largest U.S. city to be granted protection from its creditors. The horrendously diminished city has a net debt of $18.5 billion. And about half of its liabilities relate to retiree benefits, about $3.5 billion in liabilities from pensions and another $5.7 billion from retiree healthcare.

detroit bankruptcy

Detroit in dire straits

The bankruptcy law for municipalities, Chapter 9, requires a city to prove its insolvency. The provisions also required Detroit to give evidence that it negotiated in “good faith” with creditors, or was unable to negotiate because such discussions were unworkable. Most agree that Detroit is in a dire state. The city was once the hub of the global auto industry and the fourth-largest metropolis in the United States. But today it is struggling to offer even basic services to the residents. More than 40% of the city’s streetlights simply don’t work. And there are more than 78,000 abandoned buildings, according to the New York Times.

Detroit’s emergency manager Kevyn Orr said now the city will search for ways to pay off parts of its debt burden and restore essential services under the supervision of the bankruptcy court. The city plans to come out of court protection next year with a formal plan to start all over again. Detroit filed for bankruptcy in July.

Retirees oppose Detroit’s bankruptcy protection

Retirees and public sector workers wanted the city to stay out of bankruptcy protection because insolvency will take a toll on their pensions and other benefits. Now they intend to appeal as the insolvency of Detroit means their pensions could be impaired. Retirees argued that they were not given a chance to figure out an alternative to the bankruptcy filing. They added that Michigan state laws protect pension benefits from being slashed. But Judge Rhodes ruled that a pension is a contractual obligation of the municipality, and doesn’t get any special protection in case of bankruptcy.

Those against the city’s bankruptcy protection said emergency manager Kevyn Orr failed to negotiate with them in good faith. Retirees and employee unions said that Michigan governor Rick Snyder and emergency manager Kevyn Orr forced Detroit into bankruptcy without any serious attempt at finding an alternative solution.