Among those who filed for bankruptcy last year, New Mexico had the second-lowest rate of Chapter 13 filings in the country, raising the question of why so few debtors here take that route to pay back any of their debt.
Compared to a Chapter 7 bankruptcy, where most or all debts are typically wiped away, Chapter 13 bankruptcies put money into the economy in the form of debt payments.
The answer might be found by looking at the Bankruptcy Court serving western Tennessee, which has one of the highest rates of Chapter 13s in the country.
In the 2009 fiscal year, for example, the sole Chapter 13 trustee for New Mexico, Kelley L. Skehen, handled just over $7.9 million in gross debtor payments, according to the Administrative Office of U.S. Courts.
In Tennessee’s western court district, the three Chapter 13 trustees handled a combined $239.9 million in gross debtor payments in fiscal 2009. Western Tennessee had four times more bankruptcies than New Mexico, but 30 times the dollar volume of Chapter 13 debtor payments.
In his 34-plus years as a Chapter 13 trustee in Memphis, western Tennessee’s urban hub, George W. Stevenson says he has collected and distributed more than $3 billion to creditors through Bankruptcy Court in western Tennessee.
“If you’re discouraging (Chapter 13s), you’re not helping the community,” he told the Journal . “Conversely, it’s not right to force someone into a 13 when they would be better off in a 7. We walk a fine line, my friend.”
Stevenson subscribes to the theory that a high or low rate of Chapter 13s can be attributable in small part to the local legal culture, which would encompass the lawyers, trustees and judges in a bankruptcy court.
“We’ve had the system around here so long, it’s like second nature to us,” said Toni Campbell Parker, chair of the Memphis Bar’s bankruptcy section. “We have it very streamlined.”
Stevenson passed along a presentation on Chapter 13s by Judge Brian D. Lynch of the Bankruptcy Court for the Western District of Washington state.
“The variety of practice among courts in Chapter 13 can cause one to wonder if the same Bankruptcy Code and Rules apply nationwide,” Lynch says in the presentation. “It is a function of history, culture and demographics.”
The idea of using bankruptcy court to pay off debt is fairly recent, dating to the Great Depression of the 1930s in Alabama. Stevenson noted that U.S. Rep. Walter Chandler of Memphis sponsored the 1938 federal legislation that established the groundwork for Chapter 13s.
Chapter 13 remains embedded in bankruptcy courts across the Southeast. Court districts with the highest Chapter 13 filing rates in 2014 were middle Alabama at 79.9 percent, western Louisiana at 79.6 percent, southern Georgia at 78.5 percent and western Tennessee at 75.4 percent.
The prevalence of Chapter 13s in those southern states has been interpreted as a possible legacy of the Jim Crow days.
The racial makeup of Memphis, which is just over 63 percent African-American, could be a contributing factor in the area’s high rate of Chapter 13s, according to a 2012 report titled “Race Disparity in Bankruptcy Chapter Choice and the Role of Debtors’ Attorneys.”
Written by a trio of professors, the report analyzed the findings of two prior studies and found that African-Americans were roughly twice as likely as debtors of all races to file a Chapter 13 as opposed to a Chapter 7 – 54.7 percent for blacks compared to 28.2 percent for all others.
“This racial disparity cannot be fully accounted for either by local legal culture, the financial and legal characteristics of the cases, or the debtor’s nonracial demographics,” the report says, attributing the disparity to “subtle biases operating within a complex system.”
While Memphis is celebrated in culture and music, the city appears to be a hardscrabble place to make a living. Its median annual income of $36,912 is close to 17 percent below Tennessee’s statewide average and 18 percent below New Mexico’s statewide average.
Of the 90 bankruptcy court districts in the 50 states, western Tennessee had the lowest asset value for consumer bankruptcies of all types at $46,602, according to an analysis of 2013 data by the Administrative Office of U.S. Courts.
“This is an historically poor part of the state,” said Michael W. Mitchell, vice chair of the bankruptcy section of the Memphis Bar Association. “Educational achievement lags and there’s not a lot of higher-paying jobs.”
Tennessee as a whole has the highest bankruptcy rate in the country. In 2013, the state’s per capita rate was 6.6 filings of all types per 1,000 residents, compared to 2.1 filings per 1,000 in New Mexico and 3.5 per 1,000 nationwide.
“I think it’s the history of the area. It’s part of the culture,” Parker said. “I’ve seen children of former 13 filers who are now filing their own Chapter 13s.”
The high use of Chapter 13 stems from several factors, not the least of which is Tennessee’s less-than-user-friendly exemptions, Mitchell said.
The homestead exemption, which protects home equity from creditors, is $5,000 for an individual and $7,500 for a couple in Tennessee. If saving a home is a factor in a bankruptcy, the low homestead exemption virtually forces a Chapter 13, he said.
For comparison, New Mexico’s homestead exemption is $60,000 for an individual and $120,000 for a couple.
Other factors behind a high rate of Chapter 13 bankruptcies would seem to apply anywhere in the country, such as incorporating filing and legal fees into a three-to-five-year payment plan rather than paying them up front like in a typical Chapter 7 bankruptcy, Parker noted.
Certain kinds of debt can’t be wiped away or discharged through a bankruptcy – child support, alimony and back taxes, for example – but a Chapter 13 can help make the payments more doable for a debtor.
But a Chapter 13 payment plan can be tough going for a lot of people. Three out of four Chapter 13s in western Tennessee fail, compared to just over half both in New Mexico and nationwide. The most common reason for a payment plan to fail is the debtor not making the required payments.
“Not surprising when you’re living paycheck to paycheck,” Mitchell said. “People haven’t grown up in a culture with a lot of tenaciousness about paying things off.”