(Corrects quote in paragraph 14 to reflect differences remain with mono line insurers but in talks)
* Creditor lawyer sees exit schedule as unrealistic
* County says consensual plan better but can do 'cram down'
* 'Cram down' plan would spur litigation-county lawyer
By Melinda Dickinson and Sherrel Stewart
BIRMINGHAM, Ala., May 9 (Reuters) - Alabama's Jefferson County expects to file a plan by late June to exit its landmark $4.2 billion municipal bankruptcy, a lawyer for the county said on Thursday.
The 18-month-old case is a testing ground for how bondholders fare when a local government debtor becomes insolvent. Jefferson County, whose exit plan appears certain to be opposed in court by some creditors, looks likely to become the first big local government since the 1930s to impose losses on bondholders.
"We are looking at a largely consensual plan by late June, a hearing in August, voting 30 days after approval," Klee told a federal bankruptcy judge on Thursday.
Jefferson County is the largest local government in the United States to have ever filed for bankruptcy mainly because of debts taken on for a costly overhaul of its sewer system. It hopes to see its plan confirmed in October or November and to see it put into effect by year's end, Klee said.
"I believe we have made substantial progress toward a consensual agreement," Klee said.
But a creditors' lawyer, David Lemke representing Bank of New York Mellon, which is not among creditors such as JPMorgan Chase, hedge funds and mono line insurers bargaining with the county, told the judge the schedule was unlikely to be met.
Klee gave no details of terms that may be part of the county's plan of adjustment, but told Judge Thomas Bennett the county aimed to file a consensual plan with terms largely negotiated with creditors.
"We have a consensual, or largely consensual, plan, that will fulfill the objectives that we sought to reach from the first day," Klee said. "If we don't, then county will file a non consensual, or 'cram down,' plan in the same timeframe."
U.S. law gives Jefferson County, among a handful of governments in municipal bankruptcy, exclusive rights to develop and present a plan to adjust its debts and fund local government services.
Such a plan must be fair and equitable and be approved by Judge Bennett but can contain principal cuts and other terms opposed by some creditors. A consensual plan containing terms negotiated by many creditors would have a better chance of approval.
Klee said a 'cram down' plan would likely involve further legal battles in a case already costing the cash-strapped county about $2 million a month in fees and delay Jefferson County's exit from bankruptcy.
The head of the Jefferson County Commission has repeatedly said he expects savings of about $1 billion when the county, which is the most populous in Alabama, exits bankruptcy. Some investors expect bondholders to take losses.
Klee said the county may as early as next week approve an agreement with owners of some debt but that the talks over $3.2 billion of sewer debt were "very complex" and include JPMorgan Chase, hedge funds and mono line insurers.
"We are extremely close with JPMorgan in resolving all our differences. We are extremely close with the hedge funds in resolving all our differences. And we are close with the mono line insurers; we have a ways to go there," Klee said.
Klee said managers at one creditor, Bayerische Landesbank, were to decide soon on a deal to settle claims against Jefferson County. Bayerische Landesbank holds more than $105 million of the county's debt, Klee said.
Jefferson County already has in place deals with creditors Ambac Assurance Corp and Depfa Bank Plc on some claims and has slashed spending by laying off workers, closing some operations and reducing services since 2011. (Reporting by Melinda Dickinson and Sherrel Stewart in Birmingham; Additional reporting and writing by Michael Connor in Miami; Editing by Alden Bentley, Tiziana Barghini)