By Judith Ugwumadu | 4 December 2013

A US judge has ruled that Detroit will be eligible for municipal bankruptcy protection, which will allow the city to move forward with its restructuring plan to get rid of its $18bn in debt and unfunded liabilities.

The bankruptcy protection will limit the legal actions of the city’s 100,000 creditors.

US bankruptcy Judge Steve Rhodes, said in the ruling yesterday that the city’s finances were now so troubled that it could not legally increase its tax revenues, nor reduce spending without further endangering health and safety.

Rhodes also ruled that Detroit could legally pursue pension cuts, which make up half of the city’s liabilities. Trade unions had tried to protect pension entitlements from reductions.

Detroit filed for bankruptcy back in July, becoming the largest US municipality ever to do so. But a group of retired city employees, police and fire-fighter unions and others sued to block the filing.

Now, the city’s emergency manager Kevyn Orr has to submit a plan by the end of the year to reduce whatever debts it can.

Detroit pensioners cannot legally be treated differently than other creditors under a Chapter 9 bankruptcy filing, Judge Rhodes said. Pension cuts for retirees and city employees could be part of the final adjustment plan.

In a statement Orr said he would ‘move forward as quickly as possible’ with his restructuring proposals.

He said: ‘We plan to submit a plan of adjustment in the coming weeks, file a disclosure statement early next year and work to exit Chapter 9 protection by the end of September.’

Orr added that he hoped all parties would work together so a realistic restructuring plan could be developed ‘that improves the financial condition of Detroit and the lives of its 700,000 citizens.’