Feature

Detroit declares bankruptcy: What happens now?

The largest municipal bankruptcy in U.S. history could have big repercussions for the city's 700,000 residents

On Thursday, Detroit became the largest city in U.S. history to file for federal bankruptcy.

The city is at least $14 billion in debt, and could owe as much as $20 billion, according to Kevyn Orr, the city's emergency manager, who was hired by Michigan Gov. Rick Snyder (R).

The city’s Chapter 9 bankruptcy petition will now be assigned to a judge, with the hearings to be held somewhere in the Sixth Circuit, which includes Michigan, Kentucky, Ohio, and Tennessee.

Detroit has hemorrhaged residents over the last few decades, losing a quarter-million people between 2000 and 2010, which has decimated its tax base. After once boasting a population of 1.8 million, it barely has 700,000 residents.

It's all part of a slow-motion, decades-long collapse that began when manufacturers left what used to be an industrial powerhouse, abruptly halting the progress of a growing black middle class. Still, the city clung to its manufacturing roots, depending heavily on the Big Three car companies, Ford, General Motors, and Chrysler, two of which needed to go through bankruptcy proceedings themselves during the financial crisis.

"It's easy to think that the city's fault was going all in on auto manufacturing," says Evan Soltas at Bloomberg. "Detroit made a bet, and the bet went bad."

What does Detroit’s bankruptcy mean for the people who are left?

It is hard to say, because municipal bankruptcies are relatively rare, and there is no precedent for a Chapter 9 filing by a city with this much debt. The closest case occurred in 2011, when Jefferson County, Ala., filed for bankruptcy with more than $4 billion in debt.

If the bankruptcy goes forward, Orr will have a tremendous amount of power, basically taking control of the city's budgeting while Mayor David Bing and the City Council are relegated to day-to-day operations. Even those powers could be taken away by Orr if he deems it necessary.

In the short term, the city could avoid cutting public services and instituting lay-offs. Once Orr's plan to reorganize Detroit's debt is approved — which could take months or years — it's possible that the city will cut funding for its fire, police, water, and sewage departments. That is what is happening in Jefferson County, which was forced to lay off hundreds of workers and will likely have to impose dramatically higher sewage bills for residents.

Detroit’s government has demonstrated that it’s not afraid to make cuts in the past, eliminating its human services department and 2,600 city jobs — including many EMS and firefighter positions — in its last budget.

Residents could see services like snow-plowing and trash collection reduced. Union contracts could also be scrapped, and it’s almost certain that Orr will significantly cut benefits to pensioners.

Eventually, if Detroit creates a reorganization plan that satisfies bondholders, unions, and pension boards, it could one day climb out of bankruptcy. And then it will begin the hard work of rebuilding.

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