It is not just individuals or businesses that can file for bankruptcy. If a municipality falls into hard times, it too can declare bankruptcy. This is what happened to Jefferson County (a county in Alabama).

Jefferson County filed for bankruptcy protection in November 2011, becoming the largest municipal bankruptcy case in the United States. However, 2011 is not when Jefferson County's financial troubles began. In the mid-2000s, Jefferson County decided to upgrade its sewer systems. Jefferson County financed this upgrade through debt, which it apparently could not afford to pay back. Unfortunately, the best interests of the county may not have been what officials had in mind when deciding to upgrade the sewer systems: it appears that political corruption was rampant in these deals (there were charges of bribery and fraud, and over 20 people were convicted).

Thus far, the case has cost Jefferson County approximately $20 million in legal fees. However, it appears that the case is almost complete (it should be finished by the end of the year). Further, it appears that Jefferson County's plan (which still needs approval from the bankruptcy judge) will provide a benefit to the taxpayers. Under the plan, many debts will be reduced. Hedge funds, which are owed approximately $872 million, will only collect about 80 cents on the dollar. Insurers, which claim to be owed approximately $315 million, will only collect about 52 cents on the dollar (although, the county is also setting up a $25 million fund to pay claims against the insurers). JPMorgan Chase, which is owed approximately $1.22 billion, will only collect about 30 cents on the dollar. Unfortunately for the taxpayers, the plan is also going to be financed by raising sewer rates.

So, bankruptcy isn't just for individuals or businesses. In some states, municipalities can file for bankruptcy, and in doing so can cut their debts significantly.

Sources: Michael Connor, Reuters, "UPDATE 1-Alabama county files exit plan to end $4.2 bln bankruptcy," June 30, 2013; Steven Church and Dawn McCarty, Bloomberg News, "Jefferson County Files to End Bankruptcy by Cutting Debt (1)," July 1, 2013.