The Bankruptcy Capital of the World

Beginning in the early twentieth century, wage workers could look to federal bankruptcy law for relief from their debts.

Congress enacted the first long-lasting bankruptcy law in 1898, with the goal of aiding business debtors. But over that Act's first three decades of existence, a growing number of wage earners sought relief from their debts through bankruptcy. By 1925, petitions filed by wage earners outnumbered those from businesses.

In Alabama, wage earners filed bankruptcy at extraordinary rates. In both 1904 and 1905, Alabama ranked only behind New York and Illinois in the total number of voluntary bankruptcy petitions filed.[n] At that time, Alabama also regularly led the nation in the number of bankruptcy petitions filed “in forma pauperis,” meaning the filer lacked the funds to pay the court fees of $13 to $15.[n].

Nearly two decades later, in 1931, Alabama had 80 per cent more wage-earner bankruptcies than New York, even though New York had five times the population of Alabama.[n]

The City of Birmingham, Alabama became known as the "Bankruptcy Capital of America," as one report observed.

Wage earners' demand for debt relief swelled alongside the expansion of consumer borrowing in the early 20th century.

Like other Americans, Birmingham residents borrowed small sums of cash from personal finance companies. They also purchased goods, like radios and cars, by buying on the “installment plan.” And they went into debt for medical services. 

Nationally, outstanding household debt, as a percentage of household income, more than doubled between 1919 and 1929, growing from 4.6% of income to 9.3%.[n] The overall amount of debt also grew, reaching $7.7 billion in 1929.[n]

Wage earners in Birmingham looked to bankruptcy as the best means to protect their wages from seizure by creditors.

Alabama numbered among the states with the most creditor-friendly garnishment laws. If a debtor failed to pay, creditors could garnish a debtor’s paycheck or enforce a “wage assignment." Either form of “wage execution” could deprive a debtor of a significant portion of his or her future earnings. [n]

Alabama law exempted only $25 per month, or less than $1 per day, of the debtor’s wages from seizure by creditors.[n] In contrast, New York law exempted 90% of the debtor’s weekly wages.[n] 

Moreover, Birmingham creditors made full use of these powerful collection tools. In 1933-34, five large employers in Birmingham received an average of 344 wage executions per thousand employees, including one rolling mill that reported 651 executions per thousand. In comparison, a group of thirty-two large employers in New York City reported receiving approximately 21 wage executions per thousand employees.[8]

A 1905 U.S. Attorney General’s report concluded that state garnishment and wage attachment laws led to the high bankruptcy rate in Alabama, where “hundreds of poor unfortunates with total liabilities in many instances less than $500” filed bankruptcy “as a matter of self preservation.”[3]  In the Northern District of Alabama, which included Birmingham, almost half of the wage-earner bankruptcy cases filed in 1931 involved very small debts, totaling $250 or less per filer.[n]

The high rate of filings in Alabama also reflected the lack of a legitimate small-sum lending industry. As Lawrence Dumas observed in 1947, Birmingham was known as a "loan shark haven." Wage earners in search of small cash loans borrowed from companies willing to operate outside the law, at a high cost. 

These companies operated in broad daylight, running ads in the local newspapers.

Under the Alabama law, lenders could charge no more than 8 percent interest on small loans. But the prohibition lacked teeth. Charging more than the legal rate did not constitute a criminal offense.[n]

Accordingly, state law failed to check the growth of high-rate cash lending. In 1934, thirty-eight companies offered cash loans in the Birmingham, according to the city directory listings.[n] By 1938, there were forty-six.[n] In 1939, 72 different loan companies asserted claims against debtors who sought bankruptcy relief.[n]

The Alabama Supreme Court took judicial notice of the loan shark problem, estimating that in 1939, wage earners in the state paid “more than $7,200,000 in purported interest which they were under no obligation to pay” thanks to average loan charges of more than 240 percent per year.[n]

Lenders openly collected on usurious loans through extrajudicial means, such as calling the borrower and threatening to garnish his wages. These threats were powerful because many employers would fire a worker whose wages were garnished or assigned, as a matter of policy. One bankruptcy referee in Huntsville, Alabama reported that these policies armed debt collectors with a powerful threat: “Pay me or I will get your job.”[n]  

Moreover, lenders could sue in court to collect so long as the loan’s illegality was not plain on the face of the loan documents. Many received judgment by default after the borrower failed to answer the lawsuit.[n]

Economic conditions in Birmingham also stoked the demand for small loans in the 1930s and made it more difficult for wage earners to repay their debts. Along with other southern cities, Birmingham felt the first waves of the Great Depression earlier than the rest of the nation. The Roosevelt administration later deemed Birmingham “the worst hit town in the country.”

Founded in 1871, Birmingham built its wealth on manufacturing rather than agriculture and drew migrants who came in search of work from the rural South, as well as from Southern and Eastern Europe. By 1924, the city boosted 788 manufacturers and over 106,000 “industrial employees” who worked in plants and mines. Some of the largest employers manufactured iron and steel: Tennessee Coal and Iron Company (T.C.I.), Republic Steel, the Sloss-Sheffield Steel and Iron Company, the Woodward Iron Company, and the Ingalls Iron Works. 

Coal and iron production declined in the late 1920s and TCI laid off a large number of workers in 1929 after it shuttered two furnaces in the Birmingham area.[n]

Already by February 1928, city’s unemployment rate was 18 percent and the number of poor relief recipients surged.[n]

Black workers in Jim Crow-era Birmingham were among the hardest hit by the Depression.

Prior to World War I, white workers occupied virtually all of the skilled positions in iron and steel manufacturing and relegated black workers to unskilled, lower-paid jobs. In the 1910s, black workers accounted for three-quarters of the labor in the iron and steel industries in Birmingham. But then the unskilled jobs began to disappear. As manufacturers updated their facilities in the 1920s, they eliminated unskilled jobs and the number of black workers declined. Most of the new semi-skilled positions created by plant modernization went to white workers.

During the Depression, workers then cycled in and out of employment as production at the local mills and mines rose and fell, and foremen favored rehiring white workers into semi-skilled positions. Over the 1930s, the number of black industrial workers in the Birmingham ore mines and steel mills fell by a quarter.

Unemployment rates also reflected the special vulnerability of black workers in the downturn. In 1931, the unemployment rate among black workers (34.98%) was nearly double the rate of white workers (17.43%) in Birmingham. National statistics for urban unemployment during the Depression followed the same racial trends.

In addition to occupational discrimination, black workers in Birmingham were also disadvantaged by laws that limited where they could live and how they could move through the city. Birmingham legally segregated its streetcars in 1923 and housing in 1926.

The 1926 housing zoning ordinance, which remained in effect until it was declared unconstitutional in 1949, zoned neighborhoods into residential and commercial districts and segregated the residential areas by race. Black residents could live only in certain residential districts and in areas zoned for commercial use.

The pattern of racial residential segregation in Birmingham is apparent in the 1940 Census data , which shows the percentage of non-white households in each area or "tract."

Furthermore, beginning in the Great Depression, the federal government reinforced housing segregation in Birmingham through its involvement in the local mortgage market.

Over the late 1920s, as the number of wage earner bankruptcies rose, flaws in the bankruptcy system became a matter of national concern. Investigations followed.

One 1932 investigation concluded that wage earners were “driven into bankruptcy chiefly by garnishments and other attachments, even in the midst of an effort to pay in installments” and that most “desire to pay their debts in full” while avoiding the “stigma of bankruptcy.”[n] The report recommended that wage earners be allowed to “amortize” their debts rather than liquidate, citing the success of private debt amortization programs as evidence of the demand for this procedure.

In response, in March 1933, Congress added a new provision to the Bankruptcy Act: Section 74.

Section 74 did not block wage earners from filing traditional, liquidation bankruptcy.  Rather, it provided them with a second option. Section 74 allowed a debtor to file a bankruptcy petition “stating that he is insolvent or unable to meet his debts as they mature, and that he desires to effect a composition or an extension of time to pay his debts.”[n] Although not defined in the act, a “composition” traditionally allowed a debtor to make a partial payment in exchange for forgiveness of his remaining debts, while an “extension” changed the duration and terms of repayment.

Birmingham developed a distinct approach to Section 74.

Amid the Depression, a group of “merchants and credit managers” had urged Judge Grubb of the Birmingham federal district court to devise some means to lessen creditors’ losses caused by wage earner liquidation bankruptcies in the city. After the first Section 74 petition was filed, Judge Grubb asked a local attorney, Valentine Nesbit, to handle all petitions filed under Section 74 while two other bankruptcy referees continued to handle the straight liquidation cases. Birmingham was the only district in the nation to designate a special referee for Section 74 cases.

One attorney, Abe Berkowitz, represented all seven wage earners who filed the first Section 74 petitions in Birmingham.

Berkowitz's office was located on the seventh floor of the Title Guarantee Building downtown, which also held numerous other attorney offices. It stood within a four block walk from the federal building that housed the bankruptcy court.

Berkowitz was typical of the lawyers who represented debtors in Section 74 proceedings in one respect: he was young.

When wage earners came to the bankruptcy court seeking relief, Referee Nesbit referred the workers to “various young attorneys” in town.[n] Nesbit understood that attorneys would make the system run more smoothly and he wanted to promote its use. But debtors who desired an attorney had to procure private counsel because Birmingham did not have a legal aid society and did not establish one until 1954 – after every other large American city had done so. Young attorneys, who likely charged less than others in private practice, presented the most cost effective option. 

Wage earners across the city made use of Section 74 during the first year of its operation. The listed addresses of those who filed are mapped below, except for two dozen filers who could not be located.

Click on a dot to see the debtor's name, occupation, employer, race, date filed, and attorney name.

Black and white borrowers filed Section 74 petitions at rates roughly equivalent to their representation in the city's overall population, but black borrowers were underrepresented relative to their proportion of total wage earners in Birmingham.