Negotiating a Bankruptcy Exit Plan for Jefferson County, Alabama

Posted in: General Bankruptcy

I’ve posted previously about Detriot’s financial trouble, takeover by the state of Michigan, and the possibility of a Chapter 9 municipal bankruptcy.  Let’s take a look today closer to home.  Jefferson County, Alabama (home to Birmingham) filed for Chapter 9 bankruptcy protection in November, 2011.   Like Detroit, the financial crisis included an element of a local vs. state government power struggle.

Home to over 650,000 residents, the county’s bankruptcy marked the largest municipal bankruptcy in U.S. history.

The bankruptcy was filed as a result of a crisis in the county’s sewer system.  Overflowing sewage and violations of environmental regulations forced the county to borrow money for repairs.  Attempts to generate revenue to repay the debt failed.  An attempt to impose a local wage tax in March 2011 was struck down by the state legislature and the crisis intensified.  An agreement with creditors to reduce the sewer debt was denied by state lawmakers in September 2011.  By that time, the sewer debt had passed $3 billion, and with other municipal debts added the total reached $4.2 billion.

The bankruptcy has now been pending for 1 1/2 years.  A refinancing agreement between the county and most of its creditors was approved by local officials on June 4.  The lead bankruptcy attorney for the county will present the final plan to the court by June 30.

At the time of the filing, one of the largest creditors of the county, J.P. Morgan Chase, held more than $1.2 billion of the sewer debt.  The new agreement proposes that the bank give up 70% of its debt.  This concession is higher than that by other creditors under the proposed plan, and is likely due in large part to a desire to settle a pending lawsuit by the county against the bank over debt-refinancing improprieties in the early 2000s.