The Bankruptcy of Detroit and its Shock Waves

The city of Detroit, Michigan filed for bankruptcy on July 18, 2013. This is the biggest bankruptcy filing ever by city in the United States. According to various reliable sources, the municipality owes $18.5 billion dollars to creditors, pensioners and bondholders. How did this happen? The city has serious long term debt obligations. The bankruptcy will have an immediate impact on everybody in the city. It is uncommon for a city to file for bankruptcy in the United States. Simply put, a lot of people are shocked to find out that the Motor City is bankrupt.

 Detroit will have to develop a financial plan based on its assets and cash on hand in the bank. It is important for readers to know that this has been an ongoing problem in Detroit. The city leaders did not take steps to eliminate or reduce long term debts. Now, the shock wave from the debt is going to affect the citizens, the safety of the city, and the economy.

First, the citizens of Detroit will definitely feel the shock waves of the bankruptcy filing. There may be an interruption of some city services. City employees need to plan adequately for layoffs. On the other hand, city workers may get less pay and more work. Residents may have to wait longer for trash pick ups in their communities. Road repairs will be delayed and will get more expensive to repair. Some of the local libraries and recreation centers might close due to a lack of city funding. Also, the problem gets more difficult because the city has to provide water services, jail services and court services for its citizens. The bankruptcy is definitely going to change the way 5.2 million people receive healthcare in Wayne County. There are at least 6,500 old buildings that need be torn down.

Next, the safety of the community is at risk due to this bankruptcy filing. Citizens need a level of protection against crimes, fires and other emergencies within the city. If the city does not provide these services, people will leave. It is also important to note that a large number of people have already left the Motor City for various reasons. When the citizens and businesses leave, the tax revenues decrease. This is another reason why Detroit had to file for bankruptcy. City officials will have to attack high crime areas and apply for state and federal grants to help law enforcement agencies and fire departments.

Then, the economy will need fuel to keep it running. The city has to explain to creditors how they are going repay them and creditors will have to be flexible. This is an uphill battle for the city. The city owes several creditors and some of them might not agree with the repayment terms. The Motor City should expect a high number of lawsuits to be filed against its assets. The terms in the pension plans and other long term debt obligations have to be renegotiated. The debtor typically offers pennies on the dollar. For example, in this case, the creditors may receive 40 cents for every dollar that Detroit owes.

On the other hand, it is very important that the incoming management team and the existing management team increase revenues and reduce expenses. The city will have to step up collection activities from citizens and businesses. Taxing citizens is always unpopular, however, when all the bills are paid, the taxes can be lowered. The municipality will have to find ways to attract new businesses to the area. This will increase the tax revenues and bring in new jobs.

Finally, Detroit has a long way to go. The process is difficult and hard decisions will have to be made because creditors are definitely coming to the Motor City. If things do not improve, Detroit might need a financial bail out like the banks did in 2008.