(FORTUNE Magazine) – Boosters of Memphis will tell you that in their town, compared with the rest of the United States, the music's sweeter, the barbecue's smokier, and the unemployment rate's lower. What they won't brag about, however, is the fact that the bankruptcy rate is higher, too--a lot higher--almost four times the national average. This year, a member of one in 23 Memphis households will go bankrupt, the highest rate in the U.S.

What's going on in Memphis matters because the rest of America is catching up: Although this may be the best economy in U.S. history, record numbers of Americans are going bankrupt. Nationwide, personal bankruptcies since 1994 have risen 44%, to 1.1 million , while filings in the Memphis metropolitan area rose 32%. At this rate, warns Mark Zandi, chief economist of Regional Financial Associates, there's danger of a painful chain reaction. Rising consumer defaults could strain the financial system, lead to tighter credit, and ultimately cause a recession.

The roots of the problem in Memphis are tangled and deep. One problem is Tennessee's debt collection law, which makes it easy for creditors to collect overdue bills directly from borrowers' paychecks--"garnishment" in legal terms. George Stevenson, a Memphis bankruptcy trustee, says perhaps as much as a third of petitioners want to stop a garnishment. Another problem is simple overborrowing. The average Memphian owes $10,137 in nonmortgage debt, 18% more than the typical American, according to the debt rating agency Equifax. A third problem is an apparent propensity for personal misfortune. Studies have shown that three main life disasters tend to push people into bankruptcy: job loss, illness, and divorce. Memphis' divorce rate is about 10% above the national average.

But all these put together aren't enough to explain the tremendously high bankruptcy rate in Memphis. A visitor soon concludes that this boomtown has a culture of bankruptcy. The city itself went bankrupt in 1879, and so have many of its leading citizens, from the founder of the Piggly Wiggly grocery chain to rock & roll legend Jerry Lee Lewis. Because so many people have lived through bankruptcy, there's a strong informal support network for anyone in financial trouble. Friends and neighbors tell each other "bankruptcy works," says David Monypeny, Jerry Lee Lewis' manager, who claims that Lewis' 1988 filing gave "The Killer" a chance to start his life over. There's also plenty of professional support for bankruptcy: The Memphis Yellow Pages features more than a dozen large lawyers' ads offering to wipe out debts for no down payment; a Honda dealer (its slogan: "The bankruptcy specialists") runs TV commercials promising to sell you a car no matter what your credit history. For some Memphians, bankruptcy is a way of life. Most financially strapped Americans liquidate their possessions and wipe out their debts in one blow, using Chapter 7 of the bankruptcy code. Memphians prefer Chapter 13, which allows debtors to keep their property but requires regular payments for five years. (Incidentally, Chapter 13 was written by a former mayor of Memphis.) Most Chapter 13 filers lose their protection because they fail to meet repayments, so they often just refile (which, to be fair, inflates the bankruptcy statistics somewhat).

There are serious costs to being the No. 1 deadbeat, of course. It's almost impossible to cash checks in Memphis. Used-car dealers charge their wholesale cost as a down payment. And lenders are either tightening or giving up. First Enterprise Financial Group, for instance, an Illinois-based sub-prime lender, closed its Memphis operations in May.

These consequences of the bankruptcy situation in Memphis serve as a warning for the rest of the country: So far this year, personal bankruptcies nationwide are up about 20%, and they are likely to set a new record of more than 1.3 million filings. The rate may well go higher even if the economy continues to expand. A strong economy certainly hasn't reduced Memphis' rate. In fact, a Congressional Budget Office study found that bankruptcies generally rise during expansions. A University of Michigan study found that as many as 15% of Americans are prime candidates for bankruptcy. And don't expect coming congressional reforms to solve the problem. A federal commission's suggestions due this fall may end up making the nation look more like Memphis. The commissioners want to encourage people to file for Chapter 13 and to attempt to repay at least some of the debt. That's laudable, but as the Memphis experience shows, most repayment plans fail.

Eventually, a rising bankruptcy rate leads to tighter credit. Today's default rate is beginning to eat into some national lenders' profits, and some of them are already starting to pull back. Credit-card solicitations for the first quarter of 1997, for example, were 5% below the year-ago period. Some restraint may be beneficial, but too much could mean a major credit squeeze.

REPORTER ASSOCIATE Lenore Schiff