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Part 1, 2, 3, 4


A definition of terms:

Chapter 7: Liquidation

  • Property may be sold to pay down debt
  • Unsecured debts (those with no collateral like a home or car) will be erased
  • Debtor keeps "exempt" property, usually clothes, car, and household furnishings
  • You must be under the median income of your state to file Chapter 7

Chapter 13: Reorganization

Also known as "wage earner" bankruptcy because you must have a reliable source of income to repay some portion of your debt

  • Secured debts must be less than $922,975 and your unsecured debts less than $307,675
  • Repayment plan must detail how you are going to pay back your debts over the next three to five years.
  • The minimum amount you'll have to repay depends on how much you earn, how much you owe, and how much your unsecured creditors would have received if you'd filed for Chapter 7.

If you have secured debts, Chapter 13 gives you an option to make up missed payments to avoid repossession or foreclosure. You can include these past due amounts in your repayment plan and make them up over time.

[source: nolo.com]

The morning session winds down. Stevenson reflects on the people he sees each day in bankruptcy court.

"There is sometimes this perception that everyone who files for bankruptcy is somehow well-off and that they're simply using it as a way to try to avoid paying their bills," Stevenson says. "My experience has been we are basically dealing with poor people who are just struggling to try and get by from day to day."

The most common kind of bankruptcy in Memphis is called Chapter 13. Debtors repay what they can from wages over five years. Meanwhile, they can hang onto their house and car.

Chapter 13 bankruptcy has deep roots in Memphis. It was created by a local congressman in 1938 to help farmers hold onto their land during the Great Depression. Credit card companies, auto lenders, and other creditors like Chapter 13 repayment plans because they collect more money than they would from the other solution - Chapter 7 bankruptcy. Under Chapter 7, debtors usually get to keep their homes, but the rest of the debtors' property and assets, like cars and big screen TV sets, are sold off to pay unsecured creditors. There is no repayment plan. When the assets run out, most remaining debts are cancelled, although there are some debts you can't get rid of, such as student loans, child support, and alimony. Chapter 7 or Chapter 13, bankruptcy is a safety net for anyone strapped with too much debt.

"The vast majority of them are embarrassed, they are intimidated, and they are scared. And they don't want to be here," says David Kennedy, chief bankruptcy judge for western Tennessee.

Kennedy is a 25-year veteran of the court. Over those years, Kennedy's seen more and more scared, embarrassed people in his courtroom asking for financial relief. He believes the rise in filings results from a toxic brew of economic insecurity, personal catastrophe, and plenty of debt.

Kennedy says many workers live on a financial precipice. "There is, to some extent, a working poor in America, as well," he says. "There are a lot of minimum wage jobs."

And it's not just the working poor who go bankrupt. Middle income folk and well-paid professionals count among the filers. Intense global competition and dramatic technological leaps often leave workers behind.

"Folks who, at one time in their lives, had high income positions, have been downsized or outsourced or they've lost their jobs," explains Kennedy. "Instead of making $100,000 a year they may be making minimum wage and maybe even working two different jobs. And still have difficulty paying the utility bills, buying groceries and paying the rent."

When money is tight setbacks are costly.

"I think it's substantially undisputed that approximately 90 percent or perhaps even more than 90 percent of bankruptcy filings are the result of medical problems, job losses, and domestic relations or divorces," says Kennedy. "That's the vast majority. That was the case 30 years ago and it'll probably be the case 30 years from now."


Continue to part 3