A bankruptcy reform bill that is mulling its way through Congress could possibly have negative ramifications for the city of Memphis, according to some area lawmakers.
The bill, which was overwhelmingly approved by the Senate March 16 and is expected to receive support from President Bush, would make it more difficult for citizens and businesses to seek financial protection from creditors under a host of newly-proposed bankruptcy laws.
In addition, the proposed bill, which could go into effect as early as January, comes at a time when household debt in the city of Memphis has reached its highest level since 1987, according to the U.S. Census Bureau.
Clouding the picture, 21,645 personal bankruptcy petitions were filed in the U.S. Bankruptcy Court for the western district of Tennessee left Memphis and surrounding areas with the highest percentage of filings per resident in the nation last year.
"Memphis is seemingly very different, in regards to bankruptcy, than the rest of the nation," said John Dunlap, an attorney with the Waggoner Law Firm in Memphis. The firm handles bankruptcy petitions for many of the city's residents.
Out of the 21,645 filings, the majority fell under the Chapter 13 provision of the law, which allows a person to repay debts over a three- to five-year period while providing a financial umbrella to protect the filer from additional economic shortfall.
"Some people in Memphis rely on the Chapter 13 provision as the only plausible way they can pay their debts, and with the new bill, many people may face some hard times in the future," Dunlap said.
Supporters of the bill are hoping the new laws will curb the alleged abuse of the bankruptcy system and force people to pay their debts rather than completely liquidate them under Chapter 7, which currently allows a debtor to cancel most unsecured debts, in exchange for the surrender of some property to creditors.
One stipulation under the new law requires most people to attain credit counseling before filing for bankruptcy to decide whether a debtor may file, and under what provision of the law.
"The law will likely greatly reduce the number of Chapter 7s that are filed," said Jacob Winders, a credit counselor in Memphis.
Winders added the credit card industry, which has been a driving force to push the bill as well as a major contributor to the Republican Party, will be one of the biggest beneficiaries of the new law.
"The bill is creditor-friendly," Winders said. "People that could previously start fresh and avoid paying their debt in entirety under the protection of Chapter 7, will have to pay under 13."
While the new bill will likely reduce the number of filings in the area due to the added expense to file and the difficulty of the process, some people in financial jams may find themselves without a home, according to Winders.
The new bill does not allow debtors to fend off eviction under the protection of bankruptcy, according to Dunlap.
Another hurdle the bill poses for debtors is a more stringent time restraint on how often a person may file for bankruptcy.
Under the new law, debtors must withhold filing petitions for a longer duration of time, increasing the number of years between filings.
While most of the proposed changes in the bankruptcy bill concern individuals, businesses may also falter under the new laws.
In addition to individual filings, businesses will also have less time to settle debts and reorganize, according to Winder.
Intended to keep companies from languishing in bankruptcy courts, many said the new laws could ultimately force more small companies out of business by allowing less time to reorganize than larger companies.
The new law would require businesses with debts of $3 million or less to settle under a strict time table of 175 days, while larger companies are allotted more time.
Opponents of the bill said the result of this could be a loss of jobs at a time when the employment outlook is already weakening.
