By Matthew Dolan 

DETROIT--The city's emergency manager said in federal court Thursday that he is hoping to usher Detroit out of municipal bankruptcy by mid-October.

The Oct. 15 target date would fall after the expected end of the term of Kevyn Orr, who was appointed as the city's emergency manager in March 2013 through September of this year. It is possible that Republican Michigan Gov. Rick Snyder could extend Mr. Orr's 18-month term. Another state-appointed emergency manager could also replace Mr. Orr even if he is voted out by the Detroit City Council this fall.

In interviews, Mr. Orr has said that he doesn't plan to stay in Detroit beyond the end of his term in September. The former corporate bankruptcy attorney has been commuting from Detroit to his home in suburban Washington since his appointment as the city's receiver.

The target date came to light during Mr. Orr's testimony in support of an $85 million settlement with two banks owed about $270 million in pension-related debt. The city has argued that the settlement allows Detroit avoid costly litigation and secure continued access to the city's casino tax revenue, estimated at about $170 million a year.

But some creditors have raised questions about whether the proposed settlement is the best deal for the city and could unfairly leave insurers liable to pay banks for not being able to recover the full amount owed.

At issue is whether the city under Mr. Orr should have tried to break the so-called swaps agreements and recover the hundreds of millions of dollars the city has paid the bank over about the last decade. Federal bankruptcy judge Steven Rhodes in January indicated the city may have a good chance to challenge the legality of interest-rate bets that may have helped speed the city's fall into insolvency.

In testimony Thursday, Mr. Orr said he was on the verge of suing Bank of America Corp. and UBS AG in a multi-count complaint alleging fraud among other claims after the judge rejected an initial settlement in January. But the emergency manager said the banks eventually agreed to talk about a lower payout, leading to the proposed settlement that Mr. Orr described as a "steep discount."

The banks, he said, would have been unwilling to simply walk away from the debt owed and the cost of litigation for the city could have been more than $1 million a month. "I needed to get a resolution of this issue," Mr. Orr said.

The proposed settlement at issue with the federal bankruptcy court in Detroit is the third time the parties have attempted to persuade Judge Rhodes to allow the city to resolve the pension-related debt. Judge Rhodes rejected a previous deal in January, calling it too favorable to the banks.

It was unclear on Thursday how quickly Judge Rhodes intends to rule on the proposed settlement. He ordered the city to provide background documents to some of the creditors in the case, a process that could take several weeks.

The city is eager to resolve the issue before a scheduled trial on its debt-cutting plan to restructure about $18 billion in long-term obligations scheduled to start in July.

Write to Matthew Dolan at matthew.dolan@wsj.com

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