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. It’s a hurry-up-and-wait kind of place, not unlike a transportation hub in a large city. For every bankrupt person in the room, there’s a detailed account of financial hardship in some lawyer’s briefcase. While everyone has a different hard-luck story to tell, all of them have been directed here for the same reason: They’ve reached the end of the line and they’re 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. That’s 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 we’re the best at it and that’s unfortunate,” says David Ciscel, a University of Memphis professor of economics.

Everyone has an opinion about why Memphis became bankruptcy’s 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 city’s culture. Former U.S. Representative and Memphian Walter Chandler is credited with getting Congress to establish the Chapter 13 program in 1938. Since then, there’s 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 doesn’t 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 you’re a bankruptcy attorney, “America’s Deadbeat Capital” doesn’t 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 doesn’t produce the high courtroom drama that Hollywood made famous. But if cameras were allowed into this room (which they’re not), it would be the perfect place to launch a behind-the-scenes documentary about America’s 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 dealership’s 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 they’ll have to pay more for it each month.

This is a rare example where the creditors’ attorney, who wasn’t a bankruptcy-court regular, didn’t 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.

“It’s the best system in America,” says debtors’ attorney Jimmy McElroy, one of the court’s 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.

“It’s a case of necessity being the mother of invention,” says Samuel Gerdano, executive director of the American Bankruptcy Institute. “It’s 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 Castle’s 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 Castle’s 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 isn’t 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 aren’t counseling. They’re 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. “We’re 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 doesn’t get settled at the bus stop gets taken to the judge, and that takes time. Unless it’s a good fight, it won’t 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 there’s a lot of off-the-cuff lawyering and paper-pushing. There’s 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. That’s more than four times what Newsweek tabulated to be the cost of O.J. Simpson’s 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. It’s 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 doesn’t 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. They’ve 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, it’s the best way out.”

Incidentally, it wasn’t 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, I’ll pay for in cash.”

At the meeting of creditors, there aren’t 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 Rafferty’s 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 hasn’t been able to make payments because she’s recuperating from back surgery, a woman wearing gold jewelry who refiled bankruptcy so she could keep her $21,000 Altima, and that woman’s 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 creditor’s attorney casually discuss some of the observations they can’t help but make in their line of work.

“It’s really disheartening to see them [the debtors] wearing something you thought was too expensive,” says the creditor’s attorney.

Williams smiles in acknowledgement. “A lot of my clients drive better cars than me,” she says.

One thing’s 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 aren’t 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 year’s bankruptcy filings expected to eclipse last year’s 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.

“It’s 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 don’t 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 court’s mission. It says bankruptcy is supposed to provide a fresh start for debtors while treating creditors fairly.)

Evidence shows the bankruptcy system doesn’t 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 doesn’t erase hefty debts. Three to five years is a long time for bankrupts to scrimp and save, especially when there’s 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 Visa’s 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 people’s livelihoods. More than $15 million collected from bankrupts in 1997 went to attorneys, the court clerk, the trustees’ 50-person office, and administrative costs. That’s $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.

“There’s 70 bankruptcies a day filed over there,” he says, “but it’s so quiet you don’t see it. If you had 70 people standing out there, somebody would go berserk.”

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