Creditors face deadline in Detroit bankruptcy case

Banks, bond insurers, employee pension systems and others standing to lose big if a federal judge declares Detroit insolvent are expected to legally file their objections to the largest municipal bankruptcy in US history.

Monday is the deadline for creditors to file eligibility objections to Detroit's bankruptcy petition - marking the beginning of legal challenges for those hoping to recoup all or most of what Detroit owes them.

The deadline is just one of several steps that could lead to federal Judge Steven Rhodes allowing Detroit into bankruptcy protection while it restructures. Conversely, it also could spell disaster for the struggling city if its petition is denied, allowing creditors to sue Detroit if it defaults on payments, said bankruptcy expert Doug Bernstein.

State-appointed emergency manager Kevyn Orr filed for bankruptcy on July 18. He claims the city has at least $US18 billion ($19.8 billion) in liabilities, from underfunded pensions and health care costs to bonds that lack city revenue to be paid off.

Orr stopped payment on $US2.5 billion in debt in June.

Revenue from property and business taxes continues to lag, while expenses and city service costs swell. Meanwhile, Detroit's population has dropped by more than one million since the 1950s to just about 700,000 residents.

By filing for bankruptcy, Orr prevented a mad rush by worried creditors who could have sued Detroit to collect their money.

A multi-day hearing on the eligibility question is scheduled to start on October 23.

If creditors successfully remove Detroit from bankruptcy protection it "would be nothing less than catastrophic" for the city, he added, and would throw Detroit to the "wolves".

The city hopes to submit a plan to emerge from bankruptcy by the end of the year.

AP

This story Creditors face deadline in Detroit bankruptcy case first appeared on The Sydney Morning Herald.