Detroit filed the largest-ever municipal bankruptcy in U.S. history on Thursday (July 18), marking a new low for a city that was the cradle of the U.S. automotive industry and setting the stage for a costly court battle with creditors.
The bankruptcy, if approved by a federal judge, would force Detroit's thousands of creditors into negotiations with the city's Emergency Manager Kevyn Orr to resolve an estimated $18.5 billion in debt that has crippled Michigan's largest city.
Anticipating the filing, investors drove prices of Detroit bonds and notes lower, sending their yields to record highs on Thursday.
In a letter accompanying the filing, Michigan Governor Rick Snyder said he had approved a request from Orr to file for Chapter 9 bankruptcy protection noting, "Detroit simply cannot raise enough revenue to meet its current obligations, and that is a situation that is only projected to get worse absent a bankruptcy filing."
Speaking on a video released on the governor's website, Snyder, a Republican, said, "This was a difficult and painful decision but I believe there are no other viable options. Why did I do this? What's the rational and and what's the impact for both the city of Detroit and the state of Michigan? Well let me start with the fact that this is a situation that has been 60 years in the making in terms of the decline of Detroit, from a financial point of few let me be blunt: Detroit's broke."
In June, Orr presented a proposal to creditors offering them pennies on the dollar. His plan had met with resistance from some creditors, most notably Detroit's two pension funds representing retired city workers. The funds recently filed lawsuits in a state court challenging the governor's ability to authorize Orr to file for bankruptcy.
Creditors are expected to mount a stiff challenge to the bankruptcy, which was filed in the U.S. Bankruptcy Court in the Eastern District of Michigan.