ProPublica and The Atlantic published an eye-opening article about the practice in Memphis, of filing Chapter 13 bankruptcies when the client would have qualified for a Chapter 7, all to get paid.

There are two main Chapters for consumers, a 7, where for most the case is over in four months and there are no payments made to creditors, because there simply is not enough money. The other is Chapter 13, where the client must pay a monthly payment towards their debt for three to five years. The percentage of debt paid depends on income, assets and types of debt, but whatever is left owed at the end of the three to five years is discharged. This Chapter is appropriate when the client can afford to pay towards their debt, or if they would like time to catch up on a debt that they need to pay, like a mortgage. If the case is dismissed before all payments are made however, there is no discharge and all of the creditors can come back.

In Memphis, “Driving this tremendous churn of filings is a handful of bankruptcy attorneys with what sounds like an easy pitch: immediate relief, for free. In Memphis, it typically costs around $1,000 to hire an attorney to file a Chapter 7, but most attorneys will file a Chapter 13 for no money down. Ultimately, the fees for Chapter 13 filings are higher — upwards of $3,000 — but the payments are stretched over time. For many people, this is the only option they can afford: debt relief on credit. For attorneys, they gain clients — and a regular flow of fees — they might not otherwise get, even if few of their clients get lasting relief.”

The consequences of this practice have created a staggering disparity between white and black filers.

“In 2015, about half of the black debtors who filed under Chapter 13 in the district had done so at least once before in the previous five years. Some had filed as many as 20 times over their lifetimes. Here, bankruptcy is often not the one-time rescue it was envisioned to be, but rather a way for the poor to hold on to basic necessities like electricity for a couple months.”

As stated in this article, a bankruptcy discharge is life-changing when someone is living on so little that they are forced to choose between food and keeping the lights on. For someone living under 150 or 200% of the Poverty Line, any payment plan, either towards creditors or to pay a legal fee, is an insurmountable barrier to relief. This is why most of those Chapter 13 filings in Tennessee are failing.

We created the Massachusetts Debt Relief Foundation, to make sure that every Massachusetts resident can obtain the same  protections allowed by law. The ability to pay a lawyer should not prevent someone from getting help. 

For more information on our eligibility guidelines, please visit our website.