There are other options too: borrow money from other creditors (preferably on better terms) and use it to pay off the original creditors; negotiate with the creditors to pay back part of the sum, rather than the whole sum; arrange for the creditor to forgive the debt; buy out the creditor (after all, if all they own are bad loans, they might be willing to sell out for cheap)...

In particular municipal/state/government borrowers tend to prefer the first approach - usually by issuing bonds. In theory they are secured by the government's ability to levy taxes in its territory in perpetuity, so its ability to pay the bonds should be secure so long as there's likely to be future economic activity in the territory.