Series: Too Broke for Bankruptcy How Bankruptcy Fails Those Who Need It Most

Last month, ProPublica published a deep examination of how struggling black Americans are much less likely to gain lasting relief from bankruptcy than their white peers.

The story focused on Memphis, where the racial gaps in the system are starker than anywhere else in the country. Memphis also has the nation’s highest per capita bankruptcy filing rate, driven by the churn of thousands of black residents each year trying, and usually failing, to complete their bankruptcy plans — then trying again. It’s a system that works well for the high-volume law firms that file those thousands of cases, we found, but not for most debtors.

Spurred by this reporting, two Memphis City Council members, Kemp Conrad and Patrice Robinson, announced a long-term commitment last week to examining and finding solutions to the problems highlighted in the story.

“When this bankruptcy issue came to my attention, I immediately wanted to make it my next priority,” said Robinson. “We’re going to act, quickly and decisively.”

How the Bankruptcy System Is Failing Black Americans Black people struggling with debts are far less likely than their white peers to gain lasting relief from bankruptcy, according to a ProPublica analysis. Primarily to blame is a style of bankruptcy practiced by lawyers in the South.

Conrad, chairman of the council’s government affairs committee, said the thought of “the number of children trapped in poverty because their parents in turn are trapped in a cycle of bankruptcy, it should be unacceptable to all Memphians.”

Conrad and Robinson said the council plans to address the problems identified both within and outside of the bankruptcy system.

The vast majority of bankruptcies in Memphis (like much of the South) are filed under Chapter 13, which requires five years of payments before any debts are wiped away. Most debtors, ProPublica found, were unable to complete one year of payments, let alone five. When they fail, their debts rush back, now even larger because the interest kept mounting. As a result, people in Memphis regularly file for bankruptcy multiple times.

Facilitating these repeat filings are attorney fees that seem cheap, at least initially. Many attorneys will file a Chapter 13 for $0 down, with the remainder of the $3,000 to $4,000 fee built into the five years of payments. Meanwhile, filing under Chapter 7 clears away almost all debts within a few months, but requires around a $1,000 fee up front.

“This is unacceptable, and we plan to act,” the council members wrote in a blog post on Smart City Memphis. “We are still exploring the possible options, but our key take-away from the article was that there’s only about $1,000 up-front standing between someone stuck in Chapter 13 and someone getting into Chapter 7. What if the City could partner with a private non-profit to run a micro-loan fund that helps poor Memphians bridge that gap and still pay it back—all the while building credit, just like in Chapter 13—but paying interest rates set by a non-profit with only the citizens’ best interests at heart?”

The council members also said they planned to look at the forces driving so many people to file for bankruptcy. As we wrote in our story, often it’s simply to keep the lights on. The local utility, Memphis Light, Gas and Water, cut off customers’ electricity for nonpayment 98,000 times last year, even though it provides electricity to fewer than 400,000 customers.

Nearly half the Chapter 13 cases filed by black residents in the district had utility debt, our analysis of 2010 filings found. The typical debt was $1,100. For customers with poor credit, the utility has a policy of disconnecting service within a couple months if the debt tops $200.

Have You Seriously Considered Filing for Bankruptcy? If you’ve really thought about filing for bankruptcy, ProPublica wants to hear from you — even if you ultimately decided against it.

Robinson, who chairs the council’s MLGW committee, “plans to dig into the issue of cutoffs and utility debt in her committee over the coming months,” the post said.

Many debtors also ended up in bankruptcy when lenders threatened to repossess their cars. Subprime auto loans abound in Memphis, and the council members said one key reason was the inadequacy of the local transit system, which they said would be another focus.

The council members framed their efforts in the context of the approaching 50th anniversary of the assassination of Dr. Martin Luther King Jr., who, they noted, was visiting Memphis as part of the Poor People’s Campaign when he was murdered. As April 2018 approaches, “it is hard to think of a more relevant topic.”