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Objections roll in on Detroit bankruptcy filing, to what effect?

Some 100 creditors of the city of Detroit have now filed their objections to a bankruptcy filing that, if it proceeds, would be the largest municipal default in US history. Even if they lose, they may be able to slow the process – and postpone losses for city workers and retirees.

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What the challengers are likely to accomplish is to help run down the clock on Orr. He has said he wants his office to be cleared to proceed with Detroit's financial restructuring by November. That would give him until Sept. 25, 2014, to implement his plan to put Detroit on more solid financial footing. Under state law, Orr is allowed 18 months on the job; after his term expires, the City Council can vote, through a public referendum, to remove him. If it succeeds, Governor Snyder can appoint a new emergency manager, because the declared financial emergency would still exist.

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“There is nothing prohibiting Mr. Orr from serving longer than 18 months, but he would need a new contract,” says Bill Nowling, an Orr spokesman.

But the hearings to address the objectors' challenges “will use up time and resources [that Orr] will want to focus on other things” related to the restructuring, says Soref. “If I’m a creditor or a person who doesn’t want the bankruptcy, I’ll do whatever I can to muck that up. The judge’s biggest role is to keep this on track and moving,” she adds.

Judge Rhodes scheduled an Oct. 23 trial date to determine Detroit's eligibility for bankruptcy. The timing is unusually swift compared with previous high-profile municipal bankruptcies, says Michael Sweet, a bankruptcy attorney in San Francisco. Stockton, Calif., for example, had to wait nine months after it filed Chapter 9 to be designated bankrupt under law, which establishes a process for wiping the slate clean and settling debts (usually for cents on every dollar owed).

“The judge set a very aggressive calendar, but he clearly is intent on moving the process along quickly,” Mr. Sweet says.

The main potential delay could stem from creditors' challenges to Orr’s numbers that show the city to be insolvent. For example, Orr calculates the underfunded pension liabilities are $3.5 billion. But the Police and Fire Retirement System and the General Retirement System both say they are unfunded by only $640 million. The pension systems say the city is not accounting for assets, none of which they specified.

“If people want to get into nuts and bolts of city’s finances, they’re going to want to see documents, and that could really cause some delay,” Sweet says.

Mr. Nowling would not comment on what Orr would do if the court were to find that Detroit is not eligible for bankruptcy. Orr’s restructuring plan “represents the best plan possible” for the city, he says, and “it is the plan from which the city will make its case to creditors and stakeholders, whether in bankruptcy or, if necessary, out of bankruptcy.”

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