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Judge says Detroit is eligible for bankruptcy

A federal judge has ruled that the troubled city can file for Chapter 9 bankruptcy.
An abandoned home in Detroit, Michigan, Sept. 5, 2013.
An abandoned home in Detroit, Michigan, Sept. 5, 2013.

A federal judge ruled that Detroit is eligible for Chapter 9 bankruptcy protection, paving the way for largest municipal bankruptcy in U.S. history.

The ruling on Tuesday by Judge Steven Rhodes ends months of uncertainty for the troubled city, which filed for bankruptcy in July to dig out from under more than $18 billion in debt. The move has prompted an outcry from both Detroit's creditors and unions, which are worried that public-sector's pensions will be put on the chopping block.

Rhodes confirmed that cutting pensions could be legally part of Detroit's financial reorganization. "Municipal pension rights are contract rights, and that the impairment of such contract  rights in a municipal bankruptcy case is a regular part of the  process," Rod Hansen, a spokesman for the U.S. District Court in Detroit, said in a statement.

City officials expressed relief upon hearing the court's decision. "This is inevitable. No one wanted to go in this direction, but now we're here, it's important to work together," said Detroit mayor David Bing.

"We are gratified with court's ruling to pursue plan of adjustment under chapter 9," said Detroit's emergency manager Kevyn Orr after the ruling. "Typically in bankruptcy, it allows a clean slate and fresh start to remove crushing debt...We have to relieve city of that burden."

But legal battles could still hold up the city's financial reorganization. The local branch of AFSCME has already filed a notice of appeal to bankruptcy ruling, AFSCME attorney Sharon Levine told CNBC.

"In the bankruptcy, the modest pensions of Detroit¹s firefighters, police officers, and other city employees could be all but wiped out, even as Wall Street banks continue to extract hundreds millions of dollars from the city's economy," Jordan Marks, Executive Director of the National Public Pension Coalition, said in a statement.