A federal judge ruled Monday that Stockton, Calif., cannot pay its bills and has no other option than to file for bankruptcy protection.
The ruling comes despite objections by creditors who say the city didn't explore all avenues to correct its financial troubles.
U.S. Bankruptcy Judge Christopher Klein disagreed.
"It's apparent to me the city would not be able to perform its obligations to its citizens on fundamental public safety, as well as other basic government services, without the ability to have the muscle of the contract-impairing power of federal bankruptcy law," Klein said.
Stockton is the most populous American city ever to declare bankruptcy.
A combination of plummeting property values, decreasing sales and tax revenues, and generous benefits for city employees contributed to the crisis.
City officials will now begin negotiating with its creditors to make smaller payments on the millions they're owed.