CHICAGO — An Iowa water district’s long-awaited plan to restructure $140 million of debt — including $83 million of water revenue bonds — is now on hold due to litigation filed by Bank of America Corp. in an attempt to block a pending asset sale.

“The lawsuit puts our debt workout plan on hold,” said Marc DeLong, interim executive director of the Xenia Rural Water District. “It complicates the plan as a potential near-term solution to the district’s insolvency. We have to resolve the litigation as it’s a barrier to getting a solution that is in everyone’s best interest.”

The district has not yet made its latest debt-workout plan public. Its previous proposal — rejected by its major lenders — called for rate hikes, asset sales, and $45.4 million in relief from creditors.

The latest proposal did not ask holders of $83 million of the revenue bonds to forgive any principal or interest, DeLong said.

Bondholders and the U.S. Department of Agriculture’s Rural Development Agency are the district’s largest creditors. The district owes the federal agency $45.6 million in loans. Several sources said the latest proposal had received favorable reviews.

In an attempt to raise funds to pay down its debts, the district has explored selling off some assets. The board had previously approved the sale of a wastewater treatment plant in Worth County near the Diamond Jo Casino to the county for several million dollars.

But Bank of America, which is owed about $8 million by the district, recently asked the district court to block the sale. A hearing on the injunction request is scheduled for Thursday, Xenia officials said.

Bank of America officials did not provide a comment by press time.

A portion of the note proceeds provided by Bank of America helped finance the Worth County project. The bank first filed suit against the district last September demanding repayment of the notes.

The district made a partial debt-service payment of $1.8 million due Dec. 1 on its water revenue bonds. Insurer CIFG Assurance North America Inc. covered the remaining $1.26 million needed to complete the payment on the 2006 bonds. The next payment is due June 1.

The debt-service reserve has been drained and the district has been unable to make required payments to replenish it. Standard & Poor’s last year downgraded the already junk-rated credit to D from BB after it failed to make its full June 2010 debt-service payment.

A Florida-based retail investor who holds about $200,000 of the 2006 bonds said he was disappointed with the delay. “I certainly would like this resolved. I would like the bonds called and paid off,” the investor said.

The USDA earlier this year said it has since received two draft debt-workout proposals and provided positive comments, but it is awaiting a formal board-approved proposal. The agency had no comment Monday on the latest delay.

A dispute between CIFG and Assured Guaranty Corp. — CIFG’s agent under a reinsurance agreement struck in 2009 — is also the subject of litigation. CIFG filed a federal lawsuit over the summer charging Assured with breach of contract violations for Assured’s failure to cover the Xenia deal.

Assured last year decided to exclude the Xenia policy from its pact with CIFG, basing its position regarding the Xenia policy on a provision in the ­reinsurance agreement that allows it to exclude from the agreement any policy for a bond that was below investment grade as of Oct. 31, 2008.

The district’s bonds were rated investment grade at the time by Standard & Poor’s and internally by CIFG. The litigation is pending.

Some blame Xenia’s rapid expansion for its fiscal crisis. The 9,000-member district took on debt to fund expansion of its water-delivery capacity north to the ­Minnesota border, and beginning in 2002 to waste-treatment facilities serving ­customers that have been slow to join the district, contributing to operating deficits.

Under Iowa law, the district cannot file for bankruptcy.

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