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Towns and Counties Gone Bankrupt

Detroit ran out of time this week, filing for the largest municipal bankruptcy in U.S. history after being overwhelmed by $18 billion in debt.

When a company or individual files for bankruptcy, they are in a state of insolvency: Unable to pay their debts, they require legal protection to relieve or restructure outstanding obligations. Although it's much more common for these private parties to declare bankruptcy, public entities such as towns, counties and other municipal agencies in financial straits can also file for bankruptcy protection under Chapter 9.

"Bankruptcy is absolutely the last resort for municipalities and it is certainly not a cure-all," says Juliet Moringiello, professor of law at Widener University who specializes in bankruptcies, including Chapter 9. Municipal bankruptcies are handled on the federal level, so constitutional issues prevent judges from dictating how a state entity is run and thus the process cannot mandate actions such as tax increases, budget cuts, asset sales or the removal of local politicians.

Although the financial crisis played a major part the bankruptcies of many U.S. corporations, the number of municipalities filing for bankruptcy wasn't an outlier by historical standards. According to data from the American Bankruptcy Institute, there were 41 municipal bankruptcies, about eight per year, between 2007 and 2011, which is on par with average in the U.S. since 1980.

So how do these bankruptcies play out? Click ahead for some of the most notable examples of bankruptcies that hit U.S. towns and counties.

By CNBC.com
Updated 19 July 2013

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