Hear the word bankruptcy these days and it shouldn’t be a surprise if the first thing that pops into your head is the city of Detroit.

As news reports around the world are documenting, the city is in the midst of a trial to determine whether it can proceed with efforts to get out from under some $18 billion in debt by going through Chapter 9 bankruptcy.

For readers who may be wondering, Chapter 9 for governments is very much like Chapter 13 bankruptcy for individuals. Both have the goal of protecting the filer from creditors while negotiations are undertaken to restructure burdensome debt. As in Chapter 7 or Chapter 13 personal bankruptcy, an automatic stay is enforced, stopping debt collection actions. 

What is significantly different in Chapter 9 is that creditors can’t propose what they’d like to see in terms of a repayment plan. Also, governments have rather a lot of power to almost unilaterally rework collective bargaining agreements in a way that reduces their obligations on pensions and healthcare benefits to city workers.

The city and the state of Michigan say the city has no option but to seek debt relief through bankruptcy. They point to a crumbling city infrastructure and decaying delivery of public services. They also argue that city worker benefits represent a major debt load that requires correcting.  

Attorneys for unionized city workers covered by contracts, though, say the city shouldn’t be allowed to enter bankruptcy because it hasn’t really tried to negotiate contract changes in good faith. They say the plan by government officials has always been to file for bankruptcy and that negotiations over labor contracts held this past summer were little more than window dressing.

If the city is allowed to go ahead, it would represent the largest municipal bankruptcy in U.S. history. And while it would allow the city to remain in business, there are legal experts who suggest there could be a negative ripple effect on others. They note that if city workers see benefits cut, many who are already suffering will only be hurt more. They say local businesses likely would suffer, too. Bankruptcy could also lead to credit rating downgrades for neighboring cities and towns, which could leave them in tough straits.

It’s unclear when a final decision on Detroit’s petition might come.

Source: WISTV.com, “Detroit faces crucial trial in bankruptcy case,” Ed White, Associated Press, Oct. 22, 2013