Puerto Rico has roughly $73 billion (66.8 billion euros) of bond debt, and almost $50 billion of unfunded pension obligations to restructure.
The decision to resolve a portion of the debt in court is the largest effort ever made by a US government to shield itself from creditors.
While it was not immediately clear just how much of the USA -colonized island nation's $70 billion of debt would be included in the bankruptcy filing, the case is sure to dwarf Detroit's insolvency in 2013. A bankruptcy judge is expected to be appointed to oversee the process. A judge still has to approve it. Detroit owed $18 billion when it filed for bankruptcy in 2013.
Puerto Rico Chief of Staff William Villafane told The Associated Press just hours before the freeze expired that the government preferred to reach a deal with bondholders. More than 45 percent of the 3.4 million United States residents on the island live below the poverty line, with the unemployment rate more than double the USA national average.
Puerto Rico's Governor Ricardo Rossello addresses the audience during a meeting of the Financial Oversight and Management Board for Puerto Rico at the Convention Center in San Juan, Puerto Rico March 31, 2017.
"The government remains willing to continue to pursue good faith dialogue and negotiations with its creditors", the governor said in a letter Wednesday to the chairman of the federal oversight board, José Carrión.
Unfortunately for the island territory, President Donald Trump has already come out via Twitter to say he is against a bailout. He repeated that again in a recent tweet. The cost of fully paying off their debt would be around $3.5 billion a year.More news: Neymar ordered to stand trial over Barcelona transfer
The island had been expected to resort to such a step ever since Congress enacted legislation previous year that allowed for it. Even worse, CNNMoney found that a doctor a day has left Puerto Rico, causing a severe shortage of medical help as the island was fighting the Zika crisis.
Puerto Rico has reached one consensual settlement with creditors, a $9 billion deal covering its public electricity monopoly that Gov. Rosselló recently renegotiated to mitigate politically unpopular fee increases on residents.
"The result is that Puerto Rico can no longer fully pay its debt and pay for government services". That's a mere 20% of what the island had been paying creditors in the past.
A separate bondholder group, the Cofina Seniors Coalition, had a different take on the Title III decision, calling it "sound public policy" that respects congressional intent and supports an orderly debt restructuring process.
Under it, Puerto Rico has the option to negotiate with creditors outside the court system, or through it in a process equivalent to Chapter 9.
What follows now is a process called Title III, allowing the Puerto Rican government to use the courts to cut debt.
Unlike a regular bankruptcy on the US mainland, a judge can not unilaterally seize any of Puerto Rico's assets without prior authorization from the federal control board.