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What Happens When a Whole City Goes Bankrupt?

Bankruptcy news for more than the past year often brings up the city of Detroit, Michigan. Poor financial choices over decades led to one of the biggest bankruptcy cases in our nation's history. It may soon be over; the judge will deliver his ruling on November 3.

Chapter 9

Detroit filed for Chapter 9 bankruptcy in the summer of 2013. Chapter 9 bankruptcy involves a municipality, such as a city, that is overcome with surmounting debt. The first time a municipality filed for bankruptcy was in the Great Depression, and it hasn't happened often since then.

The reasons that Detroit had to file bankruptcy are, on a larger scale, some of the same reasons an individual may encounter in his or her own finances. Detroit paid its bills with borrowed money for several years. When automotive dealers, which had thrived in the city for decades, started moving to other areas, the city lost a large portion of its income. This furthered the budget deficit. And, when property values fell from people leaving the area, property taxes also started to lower, and even less money was available for the city's use. During this time, since about 2002, the city lost over 300,000 residents.

Now a plan has been submitted to the courts that will seek to restructure Detroit's more than $18 billion in debt. In part, this will be accomplished by cutting pensions and investing in solutions that will lead to less overhead in the future.

Detroit's case has been solved uniquely, in that it has found a settlement entirely in mediation. Bankruptcy judges, bankruptcy attorneys working on behalf of the city, expert witnesses and plan evaluators have been working tirelessly for the 16 months that the bankruptcy case has been open.

And in the last three weeks there has been inspired hope in the form of a comprehensive plan to restructure Detroit's finances.

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