In March of 2013, the state of Michigan hired Kevin Orr as “Emergency Manager” to get Detroit’s fiscal affairs in order.  Orr is a bankruptcy expert, who, with his assembled team, has been trying to negotiate the City’s debts with Detroit’s union and pension boards and an array of creditors.  These negotiations have accomplished little in the way of helping the City, and there is currently a lawsuit against Orr and the Governor of Detroit, Rick Snyder, trying to prevent the City from using bankruptcy to avoid cuts in workers’ benefits.

With an estimated debt of 18.5 billion dollars, Detroit is the largest city in United States history to file for bankruptcy.  Detroit filed to restructure its debts on July 18, 2013, under Federal Bankruptcy law 11 U.S.C. § 921, which applies only to municipalities.  The City claims that the large population decline coupled with the smaller tax base has exacerbated its financial predicament.  The logic is simple: fewer people to stimulate Detroit’s economy means less money going into Detroit’s businesses and less tax revenue for the City.  Detroit’s population has decreased by 250K in the past decade; leaving behind decaying businesses and a City unable to fund the services it is obligated to provide to its citizens.  There has also been some question as to whether the City has mismanaged funds for the debt to get this out of proportion.

It is not unheard of for a municipality to file for bankruptcy, but most have not been judged completely insolvent because they can still raise revenue to produce funds and pay debts though taxes.  Even the cities that have been declared completely insolvent (see Vallejo, California and Central Falls, Rhode Island), are relatively small fish compared to Detroit and the scale of its debts.

The team of experts that Orr put together to tackle Detroit’s insolvency stated that its June proposal to the boards and creditors was the City’s only shot at solving its financial crisis.  Recently, on July 19^, 2013, Judge Rosemarie Aquilina ruled Detroit’s filing for bankruptcy unconstitutional; however, Attorney General Bill Schuette intends to appeal the decision.  If Detroit is declared completely insolvent, it could be disastrous for both the City’s and the Country’s economies.  Creditors would face massive losses, and the stock market would likely take a hit.  Even if the City is not declared completely insolvent, the restructuring of that massive an amount of money is bound to be complicated and highly controversial, and replete with litigation.  The result of Detroit’s filing could be instrumental in laying the groundwork for possible future litigation as well as determining how much the economy would be affected by the bankruptcy of a city of Detroit’s size.