Stockton, Calif., filed for bankruptcy on June 28, becoming the nation’s largest city to seek protection under the U.S. bankruptcy code. The action had been expected since the City Council voted 6-1 to adopt a special bankruptcy budget to address the troubled city’s $26 million budget shortfall, according to The Associated Press (AP).

The city stopped making bond payments. The new budget suspends payments for debts and legal claims, reduces payments for retiree medical benefits, and cuts pay and benefits for employees.

Under Chapter 9 bankruptcy rules, Stockton officials retain power over daily operations, but a judge takes over decisions concerning the city’s debts. That includes deciding which creditors should be paid, how much and in what order.

Stockton, a river port of almost 300,00 people, is the seventh U.S. municipality to file for bankruptcy this year. It surpasses Bridgeport, Conn., which filed for bankruptcy in 1991 and had been the largest bankrupt U.S. city. Jefferson County, Ala., which filed in November 2011, is the largest local government bankruptcy. 

Stockton has struggled during the economic downturn with soaring pension costs, contractual obligations to city workers, a credit-fueled building boom and a precipitous drop in property tax revenues after the housing bust. The city has the second highest foreclosure rate in the country.

Stockton officials said bankruptcy was inevitable after they failed to reach agreement with creditors during mediations mandated under a new California law. It was the first use of the law. Mediations ended June 25 at midnight.

There is a state investigation into the cause of Stockton’s financial collapse, according to the Los Angeles Times. The state mediation law requires assigning blame.

For more on the filing, visit Stockton's website and the San Francisco Chronicle's coverage.