Detroit's exit from bankruptcy: Up to the judge

Detroit's plan to emerge from bankruptcy, less than two years after it became the largest U.S. city to seek Chapter 9 municipal bankruptcy protection, is coming down to the wire.

On Monday, U.S. Bankruptcy Judge Steven Rhodes heard closing arguments from city attorneys as to why he should approve the plan. Rhodes is expected to issue his ruling next week.

Detroit on the edge

At the time it filed for bankruptcy, Detroit's debt had swollen to $18 billion. The bankruptcy plan, unveiled earlier this year, is meant to restructure and ultimately resolve that debt through a variety of drastic measures, including cuts to city employee pensions and getting close to $200 million from Michigan taxpayers.

There's a complex and innovative part of the plan, as well, for the city to receive nearly a half-billion dollars from corporate and private donors toward city pensions in exchange for keeping intact the art collection at the world-famous Detroit Institute of Arts.

The plan also allows Detroit to use nearly $2 billion to fund its long-neglected city services, including the fire and police departments. And a group of hedge funds, which purchased close to $1 billion in Detroit debt, have reversed their previous objections to the city's debt reduction plan.

John Pottow, professor of law at the University of Michigan, said Detroit's plan to exit Chapter 9 has a good probability of success, in part because it closely resembles the proceedings surrounding a Chapter 11, business-related bankruptcy case.

As in a Chapter 11 scenario, the city has "systematically and methodically ... gone one-by-one and has settled with all its major creditors," he told CBS MoneyWatch.

Judge Rhodes has also moved with unusual speed to bring the plan to a resolution while ensuring it not only meets the bankruptcy code provisions but also remains feasible in the long term.

"In Chapter 9 you have to have consensus because there's really no viable alternative," Pottow noted. "If this plan gets shot down, you can't liquidate Detroit -- so it's literally just back to the drawing board, and you have to drag it out the uncertainty. People don't get paid. So there's no good alternative."

Pottow also credited both Detroit's unions and creditors for their relatively positive involvement in the proceedings. "They were the strong litigants but actually were looking at the numbers and presentations and the spreadsheets," he added. "And despite the posturing and saber-rattling they did in public, they were also smart actors."

If the Detroit bankruptcy plan is approved as Pottow believes, it could send a clear signal to other financially struggling U.S. cities that bankruptcy could help stimulate an economic regeneration.

But the real challenge, Pottow noted, is what happens after Detroit emerges from Chapter 9.

"Bankruptcy law can only relieve you from crushing debt," he said. "It can't help with vision and direction of a city. People will only want to live in Detroit if it's livable."

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