Stockton's unemployment and violent crime rates now rank among the top in the nation.
A judge has approved the California city of Stockton's bankruptcy filing, making it the most populous US city ever to enter bankruptcy protection.
A federal judge said without bankruptcy protection, Stockton would be unable to provide basic government services.
The city of 290,000, 90 miles (144km) east of San Francisco, saw its tax base plummet in the US housing market crash.
The ruling grants Stockton protection from creditors - who opposed the filing - while it negotiates debt repayment.
Stockton's creditors - bond insurers who had financed the city's debt - argued the city had not cut spending enough nor sought a tax increase to avoid bankruptcy.
But lawyers for the city said it had slashed its budget to the bone after a 70% decline in the city's tax base.
"There's nothing to celebrate about bankruptcy,'' said Bob Deis, Stockton's city manager.
The California city first filed for bankruptcy in June 2012 after failing to come to an agreement with its creditors.
Stockton slashed its police force even as crime rates have soared
During the housing boom, the city developed its waterfront, with a new marina and sports complex, and negotiated generous pension and healthcare benefits for city employees.
But when the US house market crashed beginning in 2008, the city's revenue sank when a rush of home foreclosures caused a dip in property taxes and developer fees.
Officials were forced to make dramatic spending cuts to patch a budget deficit - roughly $26m (£17m) this year. The city eliminated a quarter of its police officers, one third of the fire department staff and 40% of all other employees. It also cut wages and medical benefits.
Stockton's unemployment and violent crime rates now rank among the worst in the nation.
The city's case was being watched closely by other struggling US cities and towns that may also seek bankruptcy protection.
Stockton's largest debt is $900m owed to the California Public Employees' Retirement System to cover pension promises. The city has kept up with pension payments at the expense of other debt, arguing it needs a strong pension plan to retain its workforce.
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