The city of Detroit, Michigan, filed for Chapter 9 bankruptcy on July 18, 2013. It is the largest municipal bankruptcy filing in U.S. history by debt, estimated at $18–20 billion, exceeding Jefferson County, Alabama's $4-billion filing in 2011. Detroit is also the largest city by population in U.S. history to file for Chapter 9 bankruptcy, more than twice as large as Stockton, California, which filed in 2012. While Detroit's population had declined from a peak of 1.8 million in 1950, its July 2013 population was reported by The New York Times as a city of 700,000.
Detroit's bankruptcy filing followed a declaration of financial emergency in March 2013 that resulted in Kevyn Orr being appointed as "emergency manager" of the city by Michigan Governor Rick Snyder. Orr's subsequent negotiations sought to get creditors to willingly "take a haircut" on Detroit's debt, and were ultimately unsuccessful.
On July 19, 2013, Judge Rosemarie Aquilina of the Thirtieth Judicial Circuit Court of Michigan ruled the bankruptcy filing by Detroit violated Article IX, Section 24, of the Michigan Constitution and ordered Governor Rick Snyder to withdraw the filing immediately. On July 23, an appeals court stayed the circuit court ruling pending future rulings on Michigan Attorney General Bill Schuette's appeal. On July 24, the Bankruptcy Court added its own, federal stay of the state court proceedings. On August 2, the bankruptcy court set a hearing date of October 23, 2013, for trial on any objections to the city's eligibility for Chapter 9 bankruptcy, and March 1, 2014, as the deadline for the city to file a bankruptcy plan. After a nine-day trial on eligibility, the Bankruptcy Court on December 3, 2013, ruled Detroit eligible for Chapter 9 on its $18.5 billion debt. On June 3, 2014 the Michigan Legislature passed a package of bills to help Detroit avoid further bankruptcy proceedings. On the same day, Governor Snyder pledged to sign the package of bills.
After a two-month trial, Judge Steven W. Rhodes confirmed the city's plan of adjustment on November 7, 2014, paving the way for Detroit to exit bankruptcy. Creditors and insurers were expected to absorb losses totaling $7 billion, with creditors receiving between 14 and 75 cents on the dollar.
Background
In April 2012, Detroit Mayor Dave Bing and the nine-member City Council entered into an agreement with Michigan Governor Rick Snyder that allowed for greater fiscal oversight by the state government in exchange for the state's providing Detroit help with its finances. A financial review team was appointed in December 2012 to conduct a 60-day review. The team consisted of Andy Dillon (Treasurer of Michigan), Thomas McTavish (Michigan Chief Financial Officer and Auditor General), Ken Whippel (Korn/Ferry), Darrell Burks (PricewaterhouseCoopers), Ronald Goldsberry (Deloitte Consulting) and Frederick Headen. In February 2013, Snyder announced that the Michigan state government was taking financial control of the city of Detroit, as it viewed that Detroit failed to meet deadlines set by the state government. In accordance with Public Act 72 of 1990, the state government's Local Emergency Financial Assistance Loan Board appointed Kevyn Orr emergency financial manager of Detroit following a declaration of financial emergency. As emergency manager, Orr was granted the power to rewrite Detroit's contracts and to liquidate city assets.
A report on the financial health of Detroit was released by Orr in May 2013. The report stated that Detroit is "clearly insolvent on a cash flow basis" and that the city would finish its current fiscal year with a US$162 million cash-flow shortfall. It also stated that the city's budget deficit would reach $386 million in less than two months and that one-third of the city's budget was going toward retiree benefits.
Declining city revenue led to the cash-flow shortfall in Detroit. In 2013, Detroit’s revenue had fallen over 20% from its 2008 level. Revenue fell due to Detroit’s declining population, which reduced the property and income tax base. Rising foreclosures and unemployment following the Great Recession reduced property values and further reduced the property and income tax base. Additionally, Michigan decreased state revenue sharing with Detroit due to declining population numbers reported in the 2010 census.