(Reuters) - Alabama's Jefferson County is fully eligible for Chapter 9 bankruptcy protection and can proceed with its $4.23 billion case, the biggest ever by an American municipality, a federal judge ruled.

Overcoming arguments by creditors that the county was ineligible for bankruptcy because it had the wrong type of debt, U.S. Bankruptcy Judge Thomas Bennett issued a ruling late Sunday in Birmingham, Alabama, saying the complex case can go ahead.

Home to Birmingham, a business hub and Alabama's biggest city, Jefferson County filed for bankruptcy on November 9 after a tentative agreement with creditors unwound. The county's finances had been savaged by massive sewer system debt, political corruption and the loss of a vital local jobs tax.

Creditors such as JPMorgan Chase had argued that Jefferson County was ineligible for a bankruptcy filing because the county had no bond debt as required by state law. Like most Alabama counties, Jefferson County only had warrants, a form of debt popular in the state since the 1930s that does not require direct voter approval.

Cases brought by other U.S. municipalities, such as Harrisburg, Pennsylvania, have been thrown out by other federal judges in recent months.

In a short written ruling rejecting the creditors' arguments, Bennett said that Jefferson County "is insolvent, desires to effect a plan of adjustment of its debts and has negotiated in good faith."

(Reporting By Michael Connor in Miami; Editing by Chizu Nomiyama)




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