We Do Bankruptcy Right
By Jacqueline Marino
DECEMBER 22, 1997:
On the sixth floor of 200 Jefferson, the view from financial ruin
is a large room that bankruptcy attorneys privately call the bus
stop. On a Thursday morning in November the second busiest
month for filing bankruptcy after October the room is mobbed
with about 20 lawyers in the throes of negotiation and compromise.
Sitting in front of this bustling display of mass lawyering, a
motley group of somber individuals sits on gray, plastic chairs,
waiting for their names to be called. Some gravitate to small
pockets of space away from the crowd, where their attorneys speak
to them in hushed, hurried tones.
The bankruptcy court bus stop is ordered chaos. Its a hurry-up-and-wait
kind of place, not unlike a transportation hub in a large city.
For every bankrupt person in the room, theres a detailed account
of financial hardship in some lawyers briefcase. While everyone
has a different hard-luck story to tell, all of them have been
directed here for the same reason: Theyve reached the end of
the line and theyre looking for the way out.
Welcome to the Bankruptcy Capital of America. Before the new year,
one member of every 23 Memphis households will have gone bankrupt,
as Fortune magazine pointed out to the nation in its August 4th
issue. Thats more than 4 percent of the population the highest
rate of any city in the country. In Memphis last year, more bankruptcies
were brought into the world than babies.
Bankruptcies have gone up throughout the economic boon, but were
the best at it and thats unfortunate, says David Ciscel, a University
of Memphis professor of economics.
Everyone has an opinion about why Memphis became bankruptcys
poster child. Credit is easy, collection laws are tough, and the
Tunica casinos are close, just to name a few. But some suggest
that Memphis bankruptcy problem is more deeply rooted in the
citys culture. Former U.S. Representative and Memphian Walter
Chandler is credited with getting Congress to establish the Chapter
13 program in 1938. Since then, theres been no shortage of well-known
local bankrupts, from Jerry Lee Lewis to county commissioner Michael
Hooks, who just filed Chapter 13 for the second time this year.
Those involved in the system say that word-of-mouth has largely
de-stigmatized bankruptcy in Memphis. Unlike other parts of the
country, declaring bankruptcy here usually means filing a Chapter
13, which allows debtors to keep their possessions while making
regular payments to creditors over a three-to-five-year period.
Family and friends of bankrupts see that going belly-up doesnt
necessarily mean losing possessions or buying power. Some lenders
enable people with bad credit to purchase homes, cars, and other
expensive items at exorbitant interest rates even when they have
prior histories of bankruptcy.
Unless youre a bankruptcy attorney, Americas Deadbeat Capital
doesnt quite have the drawing potential of Home of the Blues.
But with stigma comes opportunity. Just as businesspeople have
made money off the world-famous blues and barbecue in this town,
there are also those who have profited from the multitudinous
local bankrupts.
Bankruptcy lawyers top the list. For every attorney trying to
get a client out of debt, there are other attorneys hired to try
and force him or her to pay up.
When these two interests clash at the bus stop, it doesnt produce
the high courtroom drama that Hollywood made famous. But if cameras
were allowed into this room (which theyre not), it would be the
perfect place to launch a behind-the-scenes documentary about
Americas bankruptcy capital and the people who make it so.
Scene 1 The Bus Stop
(scene described above)
In an adjacent room across from the metal detectors and the ever-vigilant
U.S. Marshals, Chapter 13 Trustee
George Emerson accesses information on computer software written
especially for bankruptcy court. When attorneys fail to reach
agreements themselves, they consult Emerson, who tries to make
sure as many cases as possible get settled outside of the courtroom.
Today an attorney for a young couple tries to persuade a used-car
dealerships attorney to allow his clients to reclaim their car,
which the dealer repossessed after they failed to make payments.
While the attorneys argue with each other, Emerson examines the
contract from the car dealership intently. When mediation fails,
he ushers the attorneys and their clients to an empty courtroom
on the ninth floor.
The attorneys continue negotiating in the hallway. By the time
they get to the door of the courtroom, the debtors attorney asks
the couple, Can you pay $150 a month? How about $125?
Despite a brusque response from one client (I want them to deliver
my car and put it right back where it was when they took it,),
the debtors agree and the matter is settled before the judge comes
out on the bench. The couple will get their car back, but theyll
have to pay more for it each month.
This is a rare example where the creditors attorney, who wasnt
a bankruptcy-court regular, didnt know the way things work around
here. Most cases get settled before the attorneys have to get
on the same elevator together.
Instead of being weighed down by the record numbers of filings,
the Chapter 13 bankruptcy court system in Memphis has become,
in essence, a virtual assembly line for patching together broken
lives.
Its the best system in America, says debtors attorney Jimmy
McElroy, one of the courts top filers. It runs like a well-oiled
machine.
Most Memphis debtors file Chapter 13 bankruptcies. Unlike Chapter
7 bankruptcies, in which debtors lose their possessions and creditors
frequently lose payment for goods and services rendered, both
creditors and debtors benefit from Chapter 13, attorneys say.
And Memphis does Chapter 13 better than just about any place.
Its a case of necessity being the mother of invention, says
Samuel Gerdano, executive director of the American Bankruptcy
Institute. Its a well-regarded system nationally because of
the combination of local culture, local law, and federal law that
has made it a model of efficiency so that everyone feels good
about the system.
People feel so good about the system, in fact, that when Memphis
debtors who are fed up with being hunted down finally threaten
bill collectors with filing bankruptcy, they usually respond with
something along the lines of Go ahead. Make my day.
Once debtors get to this point, they can look for an attorney
in the local Yellow Pages, where the word bankruptcy is featured
prominently in 30 advertisements for law offices.
Scene 2 The Attorneys
(A weary debtor sits behind a pile of bills dialing a bankruptcy
hotline.)
A friendly male voice on attorney Darrell Castles recorded 24-hour
bankruptcy information line tells callers to come to his office
because, The difference between being pushed around, being angry
and losing sleep is doing something positive about your situation.
Be in control of your life and force those bill collectors to
call someone else
The voice continues, attempting to coax the caller into making
an appointment, We have people come in, sit down, talk with us,
and leave. We have women come that are crying, we have men that
grab our hands with both of theirs and say God bless you! I
tell you, that makes us feel terrific.
Attorney Hollis Williams, who handles most of Castles bankruptcy
cases, says competition makes advertising necessary. She says
that by the time debtors come to her office, they are so steeped
in debt that bankruptcy is usually the best option.
Castle and I are both Christians, she says. We want to be honest.
We think we help them.
While Chapter 13 Trustee Emerson says the system isnt abused
to a great extent, he thinks some people file bankruptcy prematurely.
Some of the heavy advertisers could look closer at whether people
should file, he says. Some arent counseling. Theyre simply
filing.
Several debtors attorneys contacted for this article insist that
they counsel clients carefully before agreeing to represent them,
but others slough off first-time clients on paralegals. Still,
the system has some built-in checks meant to halt bankrupts from
filing multiple times within a short time span.
I see a lot of repeat filers, says debtors attorney Allen Jones,
who once saw a debtor with 16 prior bankruptcy filings. Were
under pressure not to liquidate those. We can even get hit with
sanctions.
For bankruptcy attorneys, efficiency is the key to a successful
practice. Attorneys pick their courtroom battles carefully. Whatever
doesnt get settled at the bus stop gets taken to the judge, and
that takes time. Unless its a good fight, it wont be fought
here. The more cases attorneys file, the more money they make.
The emphasis is on compromise, negotiation, and, most importantly,
volume.
The system works like a grist mill, says Pat Ardis, a former
creditors attorney who worked in the bankruptcy court for 22
years. It does work, but theres a lot of off-the-cuff lawyering
and paper-pushing. Theres not much substantive law being practiced.
When the Chapter 13 payments start rolling in, the bankruptcy
court gets paid first, then the attorneys to a certain extent
(they get $200 on the front end), then the creditors. So far in
1997, more than $125 million has been collected in the Chapter
13 program in Memphis, most of which paid on secured debts, such
as mortgages and automobile loans. Lawyers fees and other administrative
costs amounted to $12.5 million. Thats more than four times what
Newsweek tabulated to be the cost of O.J. Simpsons legal expenses
($2,897,635).
Not surprisingly, bankruptcy attorneys compose the largest section
of the Memphis Bar Association. The bankruptcy section has more
than 200 dues-paying members. Its not corporate law, but filing
personal bankruptcies for a living in Memphis can be quite profitable.
An attorney earns up to $950 per Chapter 13 bankruptcy filing,
which is considerably more than the cost of a typical Chapter
7 case. A 90-day record of 1,262 Chapter 13 filings showed the
biggest filers to be Darrell Castle, Allen Jones, and Jimmy McElroy.
Each churned out between about 30 and 40 a month.
A number of attorneys attract clients by advertising on television.
They also send solicitation letters to people who have garnishments
being taken out of their wages or who are being foreclosed on
their homes. But some attorneys say client referrals bring in
most of their business. Attorney Steven Bilsky says he gets so
many that he doesnt have to advertise.
I will actually turn people away and refer them to Consumer Credit
Counseling [Service], Bilsky says. But some people turn it down.
Theyve heard from their friends that bankruptcy works and they
want to do it.
Scene 3 The Bankrupts
(Outside a Tuesday afternoon meeting of creditors. Focus on the
crowd, which spills into the hallway.)
One debtor, who filed Chapter 13 bankruptcy two years earlier,
says she talked her sister into filing.
I got peace of mind [from it], she says. If you get into that
kind of debt, its the best way out.
Incidentally, it wasnt for her. She had to leave her job after
a long illness and could no longer afford to make a $130 payment
to her creditors every two weeks. After waiting three hours with
her bankrupt sister, she came back to court the next day to file
a Chapter 7 bankruptcy.
All of the bankrupts contacted for this story were unwilling to
discuss their personal situations unless they were assured anonymity.
Some seemed frustrated. Others were clearly relieved. Most did
not seem knowledgeable about the long-term consequences of bankruptcy.
One single, 22-year-old wiring technician who works for a security
firm says he planned his bankruptcy. He says he bought a house,
furniture, and a car before filing Chapter 13.
When asked how he feels about his credit being ruined, he is clearly
not concerned.
I made a conscious decision to do it, he says. Anything else
I need, Ill pay for in cash.
At the meeting of creditors, there arent enough seats for everyone.
Many of Hollis Williams clients wait in the hallway. Carrying
a stack of 30 cases in her arms, she squeezes through the crowd.
Any Castle clients? she asks.
People flock to her immediately. At one point the line of people
includes a blue-collar employee of a trucking company, a Raffertys
worker, and a tattooed man with a set of keys hanging off his
belt loop. In the hallway, Williams, a young, confident attorney
who has been practicing law with Castle for four years, spends
an average of about three minutes per client. Her most troublesome
cases require additional number-crunching and negotiation with
creditors.
With one particularly difficult case today, she must figure out
how a single mother with five children on government assistance
can afford to pay for the three VCRs, four TVs, and furniture
she bought from Jolly Royal Discount Stores.
Her other clients include one middle-aged woman who hasnt been
able to make payments because shes recuperating from back surgery,
a woman wearing gold jewelry who refiled bankruptcy so she could
keep her $21,000 Altima, and that womans daughter, who is appearing
today for the first time herself.
Near the end of the day, Williams awaits her turn in front of
the trustee. In a room away from the crowd where the attorneys
do most of their haggling, she and a creditors attorney casually
discuss some of the observations they cant help but make in their
line of work.
Its really disheartening to see them [the debtors] wearing something
you thought was too expensive, says the creditors attorney.
Williams smiles in acknowledgement. A lot of my clients drive
better cars than me, she says.
One things fairly obvious in bankruptcy court: the repomen, the
banks, and the credit-card companies do not discriminate against
debtors based on appearances. Many bankrupts come to court dressed
humbly. Others wear suits and dresses. They drive nice cars and
they drive creditors attorneys crazy.
Scene 4 The Creditors
(A meeting of creditors. The trustee sits at a table asking questions
of the bankrupts while creditors attorneys loom nearby.)
How would you like to do this every day? one creditors attorney
asks me. Hang out with deadbeats.
The bankruptcy bonanza keeps creditors attorneys as busy as their
counterparts. But they have a very different perspective. For
the most part, their clients arent happy about what bankruptcy
is doing to their profit margins. The credit-card company Visa
USA estimates that creditors lost $30 billion in unsecured debt
last year. With this years bankruptcy filings expected to eclipse
last years by 29 percent, things can only get worse.
To combat the shortfall, banks have raised interest rates, added
new fees, and reduced grace periods, while traditional lenders
in general have tightened credit restrictions. Recently an organized
group of banks, credit unions, credit-card issuers, and retail
stores informed Congress that it intends to fight any attempts
at making filing for personal bankruptcy easier.
Local businesses have been so alarmed by the number of bankruptcies
in Memphis that they have started an educational program that
teaches people how to manage their credit. The program also informs
them of the penalties associated with filing bankruptcy.
Its been my observation that people are just street-smart about
bankruptcy, says Ben Wages, a creditors attorney who represents
finance companies. They know they can stop the repossession of
a car or the foreclosure on a house. But their knowledge is imperfect.
They dont realize that if they file a wage-earner, they are going
to have to pay for that house and that car. They see bankruptcy
as a free ride.
Scene 5 The System
(Focus on a plaque stating the courts mission. It says bankruptcy
is supposed to provide a fresh start for
debtors while treating creditors fairly.)
Evidence shows the bankruptcy system doesnt always succeed in
giving debtors a truly fresh start, as the law intended. While
declaring bankruptcy puts an end to harassing phone calls from
collectors, and threats to repossess cars and homes, it doesnt
erase hefty debts. Three to five years is a long time for bankrupts
to scrimp and save, especially when theres so many high-interest
lenders willing to throw more money their way at tremendous costs.
Not surprisingly, debtors often drop out of the Chapter 13 program.
Emerson suspects 10 to 20 percent of bankrupts end up filing bankruptcy
more than once. Overall, a large percentage of Chapter 13s refile
because they are not being taught money-management skills, nor
are they given serious incentives to pay back their debts, according
to Visas research. Bankruptcy remains on a credit report for
up to 12 years (seven years after successful completion of a three-to-five-year
plan), regardless of how diligently the debtor makes payments.
People are always looking for an easy fix, and there is no such
thing, says Diana Fedinec, education director for Consumer Credit
Counseling, which offers a debt-management program as an alternative
to bankruptcy. Bankruptcy is not rehabilitative. Nothing is learned
from it.
While Congress looks into the bankruptcy problem and considers
instituting vast changes (including possibly encouraging more
Chapter 13s, as they do in Memphis), bankruptcies continue to
be filed in record numbers. Charles Dempsey, program director
for the Memphis Consumer Credit Association, says one cause locally
could be that bankruptcy supports too many peoples livelihoods.
More than $15 million collected from bankrupts in 1997 went to
attorneys, the court clerk, the trustees 50-person office, and
administrative costs. Thats $2 million more than unsecured creditors
received this year.
Several local businesses also have profited, including National
Bank of Commerce, which has become so efficient at handling bankruptcy-court
transactions that it now provides the same services to bankruptcy
trustees offices in 27 states, and Midland Risk Insurance, which
provides mandatory insurance at steep rates to all bankrupt uninsured
motorists. The company has extended the program to 18 other trustees
offices in eight states.
Bankruptcy in Memphis has become an industry, Dempsey says. A
real quiet one.
Theres 70 bankruptcies a day filed over there, he says, but
its so quiet you dont see it. If you had 70 people standing
out there, somebody would go berserk.
|