Chapter 9 bankruptcy: What is it?

Detroit files for Chapter 9 municipal bankruptcy, what's next?

DETROIT – Welcome to the book on bankruptcy which covers everything you need to now about Chapter 9 municipal bankruptcy.

There are three different engine chapters: 1, 3, and 5. They appear throughout the bankruptcy code and make all of it work.

The chapters that you have probably heard of are 7 and 13, which have to do with personal bankruptcy. Chapter 7 covers liquidation or just walking away from your debt. Chapter 13 means putting your debt on an installment payment plan.

Chapter 11 usually is for businesses -- although it can mean personal bankruptcy for high-income people. Many of the auto suppliers that went fins up over the years went through Chapter 11.

If you're a fisherman or a farmer, Chapter 12 is where you would go to restructure your debt.

Chapter 9: Municipal bankruptcy

Then there is Chapter 9, municipal bankruptcy. That's where cities and towns go to restructure their debt.

Chapter 9 begins with the filing which automatically stops all legal action against the city -- those looking for money. Then the chief judge of the 6th Federal Circuit chooses a bankruptcy judge to hear the case. That judge takes up the filing.

Former Detroit bankruptcy judge Ray Reynolds Graves says there is a lot that goes with that.

"They file the bankruptcy petition and they must file it with a list of all creditors, listing everyone that the city of Detroit owes. And they must file it with a proposed plan," said Graves.

We have already seen the plan of adjustment. It's the 130-page booklet Detroit Emergency Manager Kevyn Orr gave the city's creditors back in June. Though filed, this does not mean the restructuring begins.

First, Detroit needs to be declared eligible for Chapter 9. That's no easy feat when many creditors will object.

"The first thing they file is a motion to dismiss the case because the pre-petition, the pre-filing negotiations were not in good faith. There is an atmosphere of bullying and intimidation and threats," said Graves.

Judges have thrown out Chapter 9 filings after a year because they did not qualify. Should Detroit succeed, the negotiations begin in earnest with the end game of a final Chapter 9 settlement where the haircuts abound.

"This is really about creditor democracy. And as the case moves forward the creditors get to examine, develop information, find out what's really going on. They are owed reports and then down at the end of the game they vote up or down on this thing," said Graves.

A yes vote allows Detroit to emerge from Chapter 9.

Final chapter of bankruptcy book

The final chapter covers the question on when the city would emerge from Chapter 9. That's something we do not know the answer to. It could be 90 days or 10 years.

There is one thing we know for certain: The longer this takes, the longer the clock ticks, the more the meters run for the CPAs and attorneys, meaning less money for the city to come out and operate on in the future.

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