Bankruptcy Court OKs Jefferson County's Bankruptcy Plan
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Bankruptcy Court OKs Jefferson County’s Bankruptcy Plan

March 9, 2012

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Reports from Reuters indicate that the Alabama bankruptcy court has approved the bankruptcy filing of Jefferson County, which will be the country’s largest municipality to ever file for bankruptcy protection.

Before obtaining judicial approval of its Chapter 9 municipal bankruptcy filing , Jefferson County faced opposition from creditors, who insisted that the county was ineligible for bankruptcy protection because its debt is primarily in the form of warrants, rather than bonds.

State law in Alabama apparently requires municipalities to hold bonds in order to seek bankruptcy protection. It seems that Jefferson County has opted to take on debt in the form of warrants since the 1930s largely because that type of debt does not have to be directly approved by voters.

Bankruptcy Challenge Overturned for "Good Faith" Negotiation

Ultimately, the bankruptcy judge responsible for determining whether Jefferson County would be able to enter the protection of the bankruptcy court noted that the municipality could enter bankruptcy for three reasons: first, the county is insolvent; second, the county legitimately wants to work out a repayment plan for its debts; and third, the county has attempted in good faith to negotiate with creditors.

Jefferson County’s massive debt burden started with an underfunded overhaul of the area’s sewer system. It seems that the system was completely renovated, but the county never collected enough money to repay the creditors who loaned it the money to make the renovations.

Sources report that the county’s debt grew as it lost a jobs tax. In addition, it seems, political corruption and mismanagement of funds have contributed greatly to the debt woes in this Alabama county.

Municipal Bankruptcy Filings in 2011 & 2012

As the aftermath of the housing market’s boom and bust continues to play out, it seems that municipal bankruptcies are the current “big thing.” A bankruptcy court has twice rejected the bankruptcy filing of Harrisburg, Pennsylvania; Detroit, Michigan, is often cited as on the brink of bankruptcy; and Stockton, California, has recently entered negotiations aimed at avoiding a Chapter 9 bankruptcy filing.

The rash of municipal bankruptcies comes at a time when personal bankruptcy filings have actually decreased. Following a surge in personal bankruptcies at the beginning of the recession, filing rates have fallen off by 12 percent, a dip that reflects tightening in the consumer credit market and greater caution on the part of many consumers.


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