Q&A: How Detroit's bankruptcy might unfold

Q: How is a city going bankrupt different from a company or a person?

A: Chapter 9 of the federal bankruptcy code, which applies to municipalities, counties, and other public entities like school districts and utilities, differs from Chapter 11 — which applies to corporations — in a few important ways.

It's much rarer, with fewer than 700 cases since the provision was created in 1937, and 36 since 2010. For that reason, case law is still being settled. Although Chapter 9 gives a municipality much broader authority to rewrite union contracts, only after the bankruptcy of Central Falls, R.I., did it become clear that cities would have the ability to escape their pension obligations. Chapter 9 forbids debtors from simply dissolving to pay creditors, as a company might. Also, courts tend to have a less active role in the restructuring process.

Q: Is it possible to emerge successfully from bankruptcy?

A: Yes. A deliberate, enforceable reconstruction plan can actually put a municipality on a much firmer footing than any other process. Orange County, Calif., for example, emerged from its 1994 bankruptcy within a year, and nine years later had a Triple-A bond rating.

Q: Is there any way that Detroit could have avoided this one?

A: Probably not. Michigan Gov. Rick Snyder had been pushing for it for months, passing a revised version of an emergency manager law that voters had rejected last fall. Detroit's appointed manager, Kevyn Orr, had only managed to work out deals with two large banks out of the city's tens of thousands of creditors. Its public employees unions, having already offered large concessions, were unwilling to lose as much as Orr says is necessary. With a tax base that's been cut in half over the last half-century, there's simply not enough money to satisfy everyone voluntarily.

A: Along with gaining the ability to reshape its contracts with creditors and public employees, bankruptcy grants cities a stay of all collection actions, buying them time to analyze their finances and put together a plan.

Q: Who gets hurt most?

A: Detroit is about $18 billion in debt, and will only be able to pay out a fraction of that in the short term. The two main groups of creditors arguing they're entitled to that money are public employees and retirees, and bond holders. The investors are likely to make out better, since more of that debt is secured; the city will continue to pay water and sewer bondholders. Most of the pension debt has no similar backstop. City residents will likely suffer a lack of anything other than the most rudimentary public services for a long time, but the impact is likely to be felt most keenly by those who lost a large chunk of the retirement they were counting on.

Q: Will this effect other cities?

A: The inevitable downside of municipal bankruptcies is that they make cities a riskier bet for investors, so they'll have a harder time raising money for public works like utility systems and bridges. But the stigma of bankruptcy has been fading as more cities go through it.