A Michigan judge has ordered the city of Detroit to withdraw its bankruptcy request a day after filing it, throwing the city's finances into further confusion. Ordinarily, bankruptcy is a federal issue. So why is a state judge involved in the first place?
Individuals or corporations are free to file for bankruptcy whenever they want. But the situation is different for cities. Federal bankruptcy law gives state legislatures the option to block cities from filing for bankruptcy. As this map illustrates, about a dozen states let cities file for bankruptcy whenever they want. But most states only allow bankruptcy filings in limited circumstances.
Michigan is among the states that restrict when cities can file for bankruptcy. Detroit's pensioners, who stand to lose a lot of money in the bankruptcy process, asked state judge Rosemary Aquilina to rule that Detroit violated Michigan law by filing the bankruptcy request. And Aquilina sided with the pension plans, saying that she hopes Gov. Rick Snyder “reads certain sections of the [Michigan] constitution and reconsiders his actions.”
That will put the federal bankruptcy process on hold while the parties litigate whether the bankruptcy filing was proper under Michigan law. Then only if Aquilina's ruling is overturned by higher Michigan courts will the federal bankruptcy process be able to get under way.