Credit Chapter 13

Why is Tennessee number one in bankruptcies?

Why does Tennessee perennially exceed every other state in the number of personal bankruptcies per household?

Pose this question to bankruptcy lawyers, lenders, and organizations that specialize in bankruptcy data compilation, and the prevalent answer is that nobody really knows. Even U.S. Bankruptcy Judge for East Tennessee Richard Stair responds, "I wish I could answer that." And a study conducted for the Tennessee Bankers Association by a UT finance professor was inconclusive.

Traditional explanations for bankruptcy have centered on unemployment, divorce, low income, and big medical bills. And it's true that Tennessee ranks worse than the national average in all these categories. But it's by no means last in any of them, and the differences are nowhere near as great as a bankruptcy filing rate of one per 59 households in 2007 that was more than double the national average according to the National Bankruptcy Research Center.

Of late, mounting foreclosures (or the threat of some) on sub-prime and subterfuge home mortgages have been the biggest distress signal. Yet while they no doubt contributed to a 12 percent increase in Tennessee bankruptcy filings during the first half of 2008 compared to first half of 2007, that increase was well below the national average of 29 percent and far below the 50 percent-plus increases experienced in hard-hit states like Arizona, California, Florida, and Nevada. But even though the mortgage crisis has been less severe in Tennessee than elsewhere, Tennessee retains its lead in bankruptcy filings per household.

Practitioners also point to the ease with which a creditor can garnish wages, foreclose on a mortgage, or repossess a car as another determinant of bankruptcy rates. Tennessee is an easy state on all those counts, and the reasoning goes that delinquent borrowers will be quicker to file for bankruptcy to protect their assets than in states where garnishment and/or foreclosures are more difficult.

So one might conclude that Tennesseans are more prone to avoid meeting their obligations by gaining the protection from creditors that taking bankruptcy affords. But nothing could be further from the truth.

The most amazing statistical comparison with other states is not that Tennessee leads the nation in bankruptcies per household but rather that it leads the nation outright in creditor recoveries under bankruptcy court-approved repayment plans. Indeed, creditor recoveries of $541 million in Tennessee in 2007 accounted for nearly 10 percent of the national total. In California, with nearly six times Tennessee's population and twice as many bankruptcies, recoveries were less than half as much.

So the more intriguing question becomes: How come Tennesseans who've taken bankruptcy pay back so much more of their debt than in any other state? Getting at an answer requires delving into the workings of federal bankruptcy law and the predilections of its practitioners. Federal law provides for two basic types of bankruptcy known as Chapter 7 and Chapter 13.

A debtor filing under Chapter 7 gets all of their debts discharged immediately accompanied by the sale of all their assets. Since their liabilities almost inherently exceed their assets, that means that they are left with nothing, but it represents a quick way out.

Debtors filing under Chapter 13 get temporary protection from their creditors but must agree to a court-approved plan for repayment of as much as their financial circumstances are determined to permit over a three to five year period. These plans are administered by a court appointed trustee for a fee, and a debtor's attorney also typically gets fees for overseeing adherence to the plan. Unlike unsecured debt (e.g. credit cards) secured debt such as a mortgage must be repaid in full. But people faced with foreclosure can protect their homes (and home equity) by filing for bankruptcy up to the very minute before a scheduled foreclosure sale. While recent legislature efforts to allow for modification of the terms of a mortgage have failed in Congress, delinquencies at the time of a Chapter 13 filing can at best be spread out over the life of a repayment plan.

Nationally, over 60 percent of personal bankruptcy filings are under Chapter 7, but that's reversed in Tennessee, with 62 percent of last year's filing made under Chapter 13. Tennessee Chapter 13 bankruptcy trustees Gwendolyn Kerney in Knoxville and Henry Hildebrand in Nashville attribute this sharp contrast to a history and culture of Chapter 13 use that goes back many years. "Historically, bankruptcy judges in this state have supported the program, and you now have attorneys and trustees who understand how it works and how it benefits debtors and creditors," says Kerney. Hildebrand also points out that administrative fees are much lower than in many other states.

Cynics may say that Tennessee's highest-in-the-land bankruptcy rate reflects a populace that's quick to seek relief from its debts. But the highest-in-the-land recovery rates bespeak a commitment to their repayment that seems commendable to me.