Detroit bankruptcy: Which creditors get paid first?

Judge asked to pay Detroit bondholders through restricted taxes reserved for them

DETROIT – Judge Steven Rhodes is being asked to force Detroit to pay bondholders through restricted taxes that were reserved for them.

The bonds were used for a variety of projects including police upgrades, street lighting, the Detroit Zoo and three museums. The city's default is costing companies which insure the bonds more than $8 million, so far.

Complete coverage: Detroit bankruptcy

They point to a state law that says "the limited tax, full faith, credit and resources of the city are hereby irrevocably pledged for the prompt payment of the principal of and interest ... ." The word "pledge" is at the heart of the debate.

Emergency Manager Kevyn Orr, through his bankruptcy lawyers, argues the bondholders are no different than other creditors and that state protections for bondholders are trumped by the protection Detroit gets under Chapter 9.

Orr faces a March 1 deadline to file a plan of adjustment. It's expected to be filed this week.

Related: Detroit EM prepares plan of adjustment for bankruptcy court

Meanwhile, Judge Rhodes seems to be increasingly sympathetic about the costs in the bankruptcy which began last summer. The city of Detroit asked Wednesday that a committee of unsecured creditors be dissolved. They are represented by a lawyer who makes more than $1,000 an hour. Judge Rhodes said it would be more millions of dollars which the city can't afford.

He has not yet ruled on the issue.