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VOL. 125 | NO. 137 | Friday, July 16, 2010

Bankruptcy Remains On Front Burner

By Andy Meek

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When two of West Tennessee’s five bankruptcy judges arrive at the University of Memphis’ Downtown law school Monday to address representatives of a U.S. House Judiciary subcommittee, they’ll have plenty to talk about.

During the field hearing of the House’s subcommittee on commercial and administrative law chaired by U.S. Rep. Steve Cohen, D-Memphis, the bankruptcy judges are expected to be asked about the relationship between bankruptcy law and foreclosure.

One debt bankruptcy judges can’t modify is a mortgage secured by a debtor’s primary residence.

That discussion is particularly relevant in Memphis, where a consistently large wave of debtors brings their wrecked financial straits to the judges and trustees of the U.S. Bankruptcy Court.

It will also be a timely discussion, considering the second quarter saw relatively little change in the large number of debtors who filed for bankruptcy relief compared to the same period in 2009.

About 2,940 bankruptcy petitions were filed in Q2 (April through June), barely a change from the 3,056 bankruptcies filed during the same period last year, according to The Daily News Online, www.memphisdailynews.com.

The U.S. Bankruptcy Court has offices in Memphis and Jackson, and debtors can come from anywhere in the district to file.

The two major consumer bankruptcy filing categories saw similarly small drops during the quarter. The type of bankruptcy petition businesses usually file – Chapter 11 – added one to Q2 2009’s total of 13, to make 14 local businesses that sought bankruptcy court protection from creditors during the second quarter while they work out reorganization plans.

A tally of year-to-date consumer bankruptcy filings by the American Bankruptcy Institute earlier this month showed they’ve now reached their highest point since 2005 – the same year Congress passed a major revision to the nation’s bankruptcy code that was intended to curb filings.

One issue that’s become a political hot potato and which has been raised in Congress frequently is whether to allow bankruptcy judges the power to modify mortgages on primary residences to give debtors a breather.

That’s the main issue David Kennedy, chief bankruptcy judge for the U.S. Bankruptcy Court in West Tennessee, and bankruptcy judge Jennie Latta are expected to deal with Monday during Cohen’s subcommittee field hearing.

“For many, many years, bankruptcy judges have been conducting evaluation hearings on investment homes, rental homes, vacation homes, family farms, boats, cars, business equipment, commercial property, strip shopping centers – we’ve been doing all that for years,” Kennedy said. “But the only one that’s sacred is home mortgages secured by the debtor’s principal residence.”

Kennedy was in Washington last summer to address Cohen’s subcommittee on a similar topic – the need for additional bankruptcy judgeships in many districts around the country as filings continue to stack up.

After calling that hearing to order, Cohen noted that bankruptcies “are extremely high in my district, the Western District of Tennessee.”

Said Cohen: “Bankruptcies have been steadily on the rise since October 2006, well before the current economic downturn. With the significant recession that the country is currently experiencing, particularly when combined with the related foreclosure, consumer credit and health care crises, this trend has been exacerbated significantly.”

Chapter 7 bankruptcies are those filed by the most hard-pressed debtors. In those cases, debtors get to wipe away most of what they owe.

Chapter 7 filings dropped slightly in Shelby County during Q2 – from 814 in Q2 2009 to 742 in Q2 2010.

Consumer debtors who don’t qualify for Chapter 7 get steered into Chapter 13 bankruptcy, in which they agree to a court-ordered debt repayment plan. It involves paying back a percentage of what they owe.

Chapter 13 filings also dropped slightly in Shelby County during the quarter – from 2,229 in Q2 2009 to 2,183 in Q2 2010.

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