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Jefferson County, AL: Biggest Muni Bankruptcy Ever

By Cynthia Hsu, Esq. on November 10, 2011 | Last updated on March 21, 2019

Jefferson County, Alabama, has filed for Chapter 9 protection in the biggest municipal bankruptcy in U.S. history.

Jefferson County is the most populous county in the state, with 660,000 residents. It's also home to the state's economic powerhouse, Birmingham.

County commissioners voted 4-1 for the bankruptcy after a September deal over the $3.14 billion deficit fell apart. The commission says it was because creditors refused to agree to economic concessions. The effects of the Chapter 9 filing may be felt by ordinary consumers.

Part of the county's financial crisis was caused by its sewage-related debt. In fact, the September agreement called for sewer-rate increases of up to 8.2%. This might have impacted the county's poor, as 70% of sewer residents reside in the two poorest districts, according to Bloomberg.

The sewer system's court-appointed receiver told to Reuters that the Chapter 9 filing will likely translate into a sewer fee increase.

The bankruptcy may also hurt financial institutions like JPMorgan. JPMorgan held $1.2 billion of the county's sewer debt. They had originally offered $750 million in concessions to the city in the September deal.

What will happen next in the municipal bankruptcy is different than what you'd expect in a Chapter 7 or Chapter 11 filing. Chapter 9, which provides for reorganization of municipalities, has no provision for liquidation of assets. It also doesn't have a provision for distributing assets and proceeds from sales to creditors.

The bankruptcy court also plays a much smaller role in the reorganization process. The court will usually only be tasked with approving the petition for bankruptcy, confirming plans, and ensuring implementation of agreed-upon plans.

Jefferson County, Alabama, will itself be given the task of reorganizing its debt and negotiating with creditors. It's a rare occurrence, as only 40 local governments have filed for Chapter 9 protection since November 1981.

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