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Judge Rhodes grants Detroit Chapter 9 protection

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Judge Rhodes grants Detroit Chapter 9 protection

The City of Detroit is insolvent, according to Federal Judge Steven Rhodes, who announced on Tuesday the Motor City is eligible for Chapter 9 protection. The announcement ended several weeks of speculation about the legality of the bankruptcy petition, which pitted unions and pension funds against city officials.

Detroit needs help, according to Rhodes. “The city no longer has the resources to provide its residents with basic police, fire and services.” At the same time, the city can no longer rely on tax hikes to increase revenue, leaving it with little choice but to go down in history as the largest US municipality to ever file for bankruptcy protection.

State-appointed emergency manager Kevyn Orr has argued repeatedly that pension and benefit cuts are necessary to balance the city’s budget. Rhodes acknowledged that cuts may be warranted, but said he isn’t committed to approving any plan that proposes far-reaching cuts. Lawyers for the city are expected to submit a plan to resolve outstanding debts before the new-year. Orr believes the city could put bankruptcy behind it as early as 2014.

Bankruptcy protection limits the legal measures creditors can take to resolve the city’s outstanding debts, which are estimated to be worth around $18 billion. While public pensions are protected under Michigan’s constitution, Detroit pension funds cannot be treated differently than other creditors. City pensioners earn an average of $20,000 a year or less. According to Rhodes, the amount of pension debt the city owes is up for deliberation, and will be decided in the future.

Detroit “could have and should have filed for bankruptcy protection long before it did, perhaps even years before,” said Rhodes.

Detroit officially filed for Chapter 9 protection on July 18. The city’s population has declined from 1.8 million in the 1950s to less than 700,000 today. The gradual decline of the automotive industry has been one of the biggest factors behind the city’s downward spiral. This decline was accentuated after the 2008 financial crisis, which resulted in a multi-billion dollar bailout of the auto industry.

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