(Bloomberg) -- Stockton, Calif., the biggest U.S. city to file for bankruptcy, will restart negotiations with creditors while it develops a plan to adjust its debts and exit court protection by year’s end, a city lawyer told a judge.

Lawyers for the city and creditors told a federal judge Wednesday that they want to try to negotiate an end to the Chapter 9 case after a months-long fight over whether Stockton should be thrown out of bankruptcy.

“We need to start talking,” city attorney Marc Levinson told U.S. Bankruptcy Judge Christopher M. Klein in Sacramento.

“We are trying to go back to negotiations to see if we can work out a deal,” attorney Jeffrey E. Bjork, who represents creditor Assured Guaranty Corp., said in court.

The city’s goal is to file a plan to adjust its debt sometime in the third quarter of this year and, assuming Klein approves it, exit bankruptcy by year’s end.

This month creditors including Assured and Franklin Resources Inc. lost a battle to force the city out of bankruptcy. Klein ruled that the city was eligible to remain in bankruptcy, where it’s protected from creditor lawsuits, while it develops a plan to reduce its debt.

Both lawyers were responding in part to a request by the California Public Employees’ Retirement System, or CalPERS, to start a formal process of exchanging documents and interviewing witnesses.

CalPERS has requested the right to interview creditor witnesses under oath as it prepares to participate in the city’s bankruptcy.

Klein declined to immediately grant that request.

The city of 296,000 has said it will try to force creditors, including bondholders, to take less than the principal they are owed.

No city or county since at least the 1930s has used the power of a U.S. bankruptcy court to force a reduction in its debt principal.

Stockton rode a surge in new-home construction in the 2000s before the housing crash set off a wave of foreclosures that sapped tax-revenue gains.

The case is In re Stockton, 12-32118, U.S. Bankruptcy Court, Eastern District of California (Sacramento).

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.