KNOXVILLE, Tenn. — Tennessee’s bankruptcy laws encourage risky lending practices and contribute to the state’s high bankruptcy rate, a University of Tennessee economist said Thursday.
Dr. Matt Murray, director of UT-Knoxville’s Center for Business and Economic Research, said state law forces debtors to pay themselves out of bankruptcy, allowing creditors to “garnish” or collect money from a debtor’s employer or other income.
This gives lenders security and incentive to provide high-risk loans, especially to low-income debtors, Murray said.
“Lenders can make loans to marginal customers, and if those individuals default on their loans, the creditor can really go after them,” Murray said. “That is effectively what is happening in Tennessee — they are loaning to people who perhaps should not be given credit, then going after them in a big way.”
The Wall Street Journal reported Wednesday that Tennessee has the nation’s highest bankruptcy rate at 25.1 per 1,000 households, compared to the U.S. rate of 13.6 per 1,000, and 16.75 for the Southeast.
States that do not allow garnishment, such as Texas, Pennsylvania, and North and South Carolina, have the lowest rates.
However, bankruptcy rates do not indicate a state’s overall economic strength or weakness, Murray said.
Tennessee’s high bankruptcy rate is driven by legal structures, not overall economic health, he said.
“It would be a terrible mistake to compare bankruptcy in Tennessee to bankruptcies in other states because there are fundamental legal differences that make the numbers meaningless,” Murray said. “We must be very careful when using bankruptcy rates to draw inferences about economic activity and health because it is influenced by a state’s legal structure as much as it is by a state’s economy.”
Contact: Dr. Matt Murray (423-974-5441)