By John Clark
Jefferson County, Alabama, which became the largest municipality to file for bankruptcy in U.S. history, has filed a plan to cut $1.2 billion in debt, according to a report from Bloomberg News.
And if the bankruptcy plan is approved by a judge, sources expect Jefferson County to exit bankruptcy and continue on its path to financial health within a matter of weeks.
Jefferson County Looks to Exit Bankruptcy
According to reports, the county’s financial troubles were primarily the result of misguided loans purchased by municipal authorities in an effort to revamp its outdated sewer system.
After the recession struck in 2007, and the county’s revenues dried up, it started defaulting on billions of dollars in loans. Sources report that the county owes roughly $4.2 billion in unpaid debt.
But under the terms of the proposed bankruptcy plan, Jefferson County will only have to pay a fraction of its debt. Sources note that this would mark the first time Americans holding municipal debt would be forced to take a loss on their investments.
Sources report that the county will not have to make full repayments on any of its $3 billion worth of sewer debt, which will allow the area of roughly 300,000 residents to exit bankruptcy with a great deal of hope for its future.
According to David Carrington, the Jefferson County commissioner, the proposed plan “solves both of the problems that prompted the commission to file the largest Chapter 9 bankruptcy case.”
Sources indicate that Carrington is referring to the sewer debt, which is the biggest financial albatross around the county’s neck, and other, more routine bonds that have been backed by taxes.
Bondholders and Banks Stand to Lose Under Bankruptcy Plan
While bondholders will likely take a significant loss under the proposed bankruptcy plan, financial institutions stand to lose a considerable amount of money, as well.
Sources say JPMorgan Chase, which owns a large amount of sewer debt, will only collect 31 percent of Jefferson County’s unpaid debt. Seven hedge funds also expect to lose a lot of money due to the county’s bankruptcy filing.
If the bankruptcy court in Birmingham, Alabama, approves the deal, it would end a year and a half of legal tussles between Jefferson County and its angry creditors.
But the deal has yet to be finalized. Sources expect U.S. Bankruptcy Judge Thomas Bennett to officially rule on the proposal in November. In the interim, Bennett wants to give junior creditors an opportunity to offer their own input, sources say.
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