Bankruptcy repayment plan for Detroit to be reviewed in Court

The bankruptcy judge overseeing Detroit’s bankruptcy has decided that retirees, unions and others opposed to Detroit’s financial bankruptcy repayment plan will have their day in Court. Monday U.S. Bankruptcy Judge Steven Rhodes announced the trial to debate Detroit’s bankruptcy repayment plan will be scheduled for mid-June.

Meanwhile, Detroit and its creditors will have until this Friday to make their objections to the scheduling order which will allow the creditors almost a month to file their objections to the bankruptcy repayment plan with the court.

Detroit’s bankruptcy is considered the largest municipal bankruptcy in the history of the United States. According to Reuters, “A hearing on legal arguments to restructure $18 billion in debt is scheduled for April 28. The trial on factual issues will begin on June 16 and could extend until June 27.”

What does the bankruptcy repayment plan allow?

 

Under the bankruptcy repayment plan filed last Friday in court Detroit bondholders will take the largest cuts. Pension plans will also see some cuts but not as deep. Much to the dismay of Detroit bondholders, some of the bond debt was classified as unsecured debt and lumped in with nearly $12 billion in other unsecured debts.

The classification in the bankruptcy repayment plan has led to fierce objections from bondholders who argued that not only were they being treated “unfairly,” other creditors such as the pension holders, should also bear some of the losses.

The court has ordered all parties to continue negotiations and find a way to work together. Detroit’s emergency manager is scheduled to leave his position by September, but Detroit hopes everything will complete by that time.

What will happen to the bond market if bankruptcy repayment plan is accepted?

 

Experts warn that if bondholders get what has been termed an “80% haircut on their investments” this is likely to set a disturbing precedent for U.S. municipal bond market.

Fitch’s rating agency agreed, “Fitch considers Detroit’s plan of adjustment to be hostile to GO bondholders. If this priority of creditors is upheld, Fitch expects that this disregard for the rights of bondholders will factor into higher borrowing costs for local issuers, and ultimately for local property taxpayers, in Michigan.”

Pension funds have fared much better in the plan negotiations. Not only did Detroit decide to repay more of the debts, the pension funds have also been aided by additional private entities who have decided to raise more than $830 million. Much of the funding comes from private philanthropic foundations and the Detroit Institute of Art, but Michigan Governor Rick Snyder is also attempting to raise an additional $350 million, although this effort must be approved by the state’s legislature.

As mentioned above, Judge Steven Rhodes will rule on the bankruptcy repayment plan in a few weeks but has asked all parties to continue their negotiations to resolve their differences.

In other news, the Appeals Court accepted the Detroit bankruptcy case and will review the legitimacy of Detroit’s bankruptcy, although the case will not be expedited.

 

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Beth

Beth L. is a content writer for Better Bankruptcy. Good content and information is one of many methods we utilize to bring you the answers you need.