On Friday, Detroit became the largest U.S. city to declare bankruptcy. Municipalities, such as cities, towns, and counties, can enter reorganization under Chapter 9, Title 11 of the U.S.Code. The U.S. Courts website provides a basic overview of Chapter 9 reorganization on the following page, Chapter 9: Municipality Bankruptcy.
Under Chapter 9 reorganization, a municipality is protected from creditors while it determines a plan to adjust its debts. The American Bankruptcy Institute provides quarterly statistics on the number of municipalities that have filed for Chapter 9 since 1980 (ABI Chapter 9 Filings 1980 – Current Table).
No one factor led to Detroit to this final solution. Detroit has been in decline for years due to job losses among the U.S. auto industry. According to USA Today, citing a letter from Michigan Governor Rick Snyder, several factors that led to the city eventually filing bankruptcy included:
- Unemployment rate double the national average
- Homicide rate at historical levels
- Average of 58 minutes for police to respond, compared to average of 11 minutes nationally
- 40% of the city’s street lights not working
- 78,000 city structures abandoned
In total, the filing listed more than 100,000 creditors and more than $1 billion in estimated liabilities (possibly even $20 billion total). For full details on the matter, you can review the bankruptcy petition filed by the city with the bankruptcy court for the Eastern District of Michigan: Detroit Bankruptcy Petition Filed In United States Bankruptcy Court.