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The Story of Detroit | Proof That Cities Can Go Bankrupt Too.

by The Bankruptcy Service

Posted on January 28, 2015 at 14:30 AM

Detroit Declares Bankruptcy

When we think of bankruptcy, many of us will think of individuals or companies. But it might surprise you to know that bankruptcy is a process that entire cities have gone through too.

Just before Christmas, Detroit finally began paying off its creditors having gone through its own bankruptcy process, a large fall from grace for a city that was once the centre of the planet's automobile industry and gave us Motown. The biggest city in Michigana and the biggest city along the length US/Canadian border, the city is the 3rd largest economic force in the Midwest region of the US.

Sinking under huge debts and decades of mismanagement, Detroit formally filed for bankruptcy in July 2013, becoming the biggest US city ever to take such a drastic measure (in terms of population, it is the 18th biggest US city). It was a city in rapid decline, basic services and amenities denied to many of its residents.

How did such a large metroplois get to this point of decay? Industrial decline was exacerbated by a mass exodus, the population declining 25% between 2000 and 2010, especially many "middle-class" families who left to find work elsewhere. What was left was a poorer population, many of whom weren't paying taxes in full, making the problem even worse."

Kevyn Orr is the emergency manager of the city of Detroit, Michigan. He was appointed by Governor Rick Snyder in March, 2013. Orr began, along with a host of creditors, a legal consultation period to determine whether the city, with $18.5 billion of debts and liabilities, was eligible for bankruptcy protection.

Before proceedings, Detroit was a city that had fallen apart at the seams. At its lowest ebb, it took police an hour to respond to calls, only a third of ambulances were in service and there were a massive 78,000 abandoned buildings in the city. The unemployment rate was close to triple that of 2000 and the homicide rate was its highest for four decades. Only 40% of the city’s lights functioned. It was a city barely operating.

Orr set out a restructuring plan for the city, which has been plagued by corruption and plummeting revenues for years. Naturally there was great resistance to the plans, as in this desperate situation, sacrifices were needed. Pension groups and bondholders were at the front of the queue, with one group actually suing Orr to try and stop the plans.

Orr had warned bankruptcy was not an easy path. "This will make it hard for the city to conduct day-to-day business. It will drain a lot of time, it could put people off moving businesses to Detroit and it could last for years," he said.

For the poorest in the city, it the plan will make life especially hard. About 60% of Detroit’s children live in poverty, which is why Orr originally wanted to bus creditors into the poorest areas to show them what was at stake.

Detroit is not the first American city to face such problems. New York (1975) and Philadelphia (1991) came close to going bankrupt, but brokered deals, whilst Cleveland in Ohio was named “the mistake on the lake” after going bust in 1978. Further afield, Akaike in Japan, Taranto in Italy, Newfoundland in Canada and Jefferson County have all been down similar paths. Akaike took a decade to be declared solvent.

Back in Detroit, Orr said bankruptcy was not his preferred option, but as talks hit the rocks, his options narrowed. Now, there is finally light at the end of the tunnel. Businesses are growing, the car industry is recovering, and some areas are being revitalized. The creditors are now being paid off, and Orr commented last month that the crisis had been rectified, and the city was poised to grow. Orr has now resigned from his post, having seen through a plan that will wipe $7 billion off Detroit’s total debt.

The city still has a long way to go - and many of the city's pensioners were forced to accept cuts to their future benefits in order to appease creditors. Assets have been lost too, such as the hockey stadium (to investors) and there is still work to be done. But like any bankruptcy, the road to recovery has begun, and the hope is that by making sacrifices now, the future for the city and the next generation will be far brighter than what has just gone before.

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