Automaking capital, Detroit became the largest US city ever to move for bankruptcy, with a liability running into USD18 billion.
"Today I authorised Detroit's emergency manager to seek federal bankruptcy protection for the City of Detroit. This is a difficult, painful step, and it is one I would not be authorising if I felt any other viable option remained," the Michigan Governor Rick Snyder said in a video message posted on his website.
Detroit which at one time had some two million population has now reduced to just 70,000.
"The fiscal realities confronting Detroit have been ignored for too long. I'm making this tough decision so the people of Detroit will have the basic services they deserve and so we can start to put Detroit on a solid financial footing that will allow it to grow and prosper in the future," the governor said.
Snyder said the move was a difficult step, "but the only viable option to address a problem that has been six decades in the making".
The decision allowed Detroit Emergency Manager Kevyn Orr to make a filing under Chapter 9 of the federal bankruptcy law.
Chapter 9 protects financially distressed municipalities from creditors while their debts are resolved under the direction of a bankruptcy judge.
Detroit has more than USD18 billion in debt and unfunded liabilities and doesn't have the revenues to meet those obligations and provide an adequate level of services to its people, who pay the highest taxes per capita in Michigan.
Currently, 38 cents of every city dollar goes toward debt repayment, legacy costs and other obligations. By 2017 that figure is expected to reach 65 cents per dollar.
"Bankruptcy is the only feasible option to fix the city's finances and do what is right for the 700,000 people of Detroit," Snyder said.
A White House spokeswoman said, "the US President and members of the President's senior team continue to closely monitor the situation in Detroit."
"If Detroit comes out of this a decent credit risk, other municipalities are going to absolutely want to follow their lead," a daily quoted Ken Noble, a New York bankruptcy lawyer as saying.
"This is absolutely a watershed event for municipal finance. And, really, it is the only shot that Detroit really has," he said.
Daniel C Miller, the city comptroller in fiscally pressed Harrisburg, Pennsylvania said that Detroit's move could prove to be a model for other distressed cities across the country.
"I like what is happening in Detroit very much," Miller told a daily.