Local legal cultures and consumer bankruptcy

“In Memphis, an entrenched legal culture has made bankruptcy a boon for attorneys while miring clients in a cycle of futility.” [Paul Kiel with Hannah Fresques, ProPublica/The Atlantic]

Under federal bankruptcy law, people overwhelmed by debt have a choice: They can either file under Chapter 7, which wipes out debts and, since most filers lack significant assets, allows them to keep what little they have. Or they can choose Chapter 13, which usually requires five years of payments to creditors before any debts are eliminated, but blocks foreclosures and car repossessions as long as debtors can keep up. In most of the country, Chapter 7 is the overwhelming choice. Only in the South, in a band of states stretching from North Carolina to Texas, is Chapter 13 predominant….

Upon filing, debtors are shielded from garnishments and debt collectors. But whereas under Chapter 7 those protections are generally made permanent after a few months, under Chapter 13 they last only as long as payments are made. Most Chapter 13 filers in Memphis donā€™t last a year, let alone five.

The two options have a different structure of legal fees. While Memphis lawyers typically charge around $1,000 for a Chapter 7, most offer a Chapter 13 for free. “Ultimately, the fees for Chapter 13 filings are higher ā€” upwards of $3,000 ā€” but the payments are stretched over time.” Now, the no-money-down model of Chapter 13 bankruptcy is spreading to Northern states. But there is another point of view as well: “many see Chapter 13 as the more honorable form of bankruptcy because it includes some attempt to repay debts.”

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