Racial Inequalities Extend to Bankruptcy

The events of the past year have turned a bright spotlight on racial inequities. But, the disparity in the consumer bankruptcy arena isn’t fresh news. Back in 2017, ProPublica conducted an in-depth study of race and bankruptcy. The news was discouraging, but unsurprising to seasoned bankruptcy attorneys.

Bankruptcy Filings by Race

The study data revealed that:

• Bankruptcy filing rates are higher among blacks than whites

Both Chapter 7 and Chapter 13 filings are higher among black Americans, black debtors are more likely to file Chapter 13. Across a seven-year period, 72% of filings in white zip codes were Chapter 7 filings, compared with 49% in black zip codes.

• Black Chapter 13 filers are less likely to succeed

Chapter 13 bankruptcy is the best solution for some people struggling with debt. Unfortunately, the discharge rate for Chapter 13 filers in black zip codes is significantly lower than that in white zip codes: 39% versus 58%. That disparity holds true across all income levels, with the greatest gap among low-income filers. The odds of a Chapter 13 case being dismissed in black zip codes are more than double the chances in white zip codes.

• Black Chapter 7 filers are more likely to file on their own

In states with significant numbers of Chapter 7 filings in black zip codes, the pro se filing rate is significantly higher in black zip codes than white. Among the states examined, Chapter 7 filers in black zip codes were 4 times to more than 11 times as likely to file without an attorney.
Chapter 7 filers in black zip codes are also less likely to receive a discharge

Chapter 7 discharge rates in black zip codes are also lower than discharge rates in white zip codes. In four states examined, discharge rates for Chapter 7 filers in black zip codes ranged from 72-94%, while discharge rates in white zip codes were all 97% or higher.

What’s Behind the Disparities?

A variety of factors may impact the different ways bankruptcy plays out for black and white debtors. Though black Americans typically earn less than their white counterparts, researchers determined that the income disparity alone didn’t explain the differing filing rates, trend toward Chapter 13, and lower success rate.

Some other factors include:

• Lower average wealth, meaning that financial security is more easily destabilized by loss of income, unexpected expenses and other disruptions
• Greater variance in income from year to year
• Significantly fewer assets, including a lower likelihood of owning real estate
• Chapter 13 filers in black zip codes tend to be poorer and less likely to own homes

The final two points above suggest that black bankruptcy filers are more likely to file under Chapter 13 when it is not necessarily beneficial. Protection of non-exempt assets and efforts to keep secured property such as a home with a delinquent mortgage are two of the main motivations for choosing Chapter 13.

Chapter 13 Filings in Southern Low-Income Debtors

At the time of the study, Chapter 13 filings had accounted for at least half of consumer filings in the southern states of Alabama, Arkansas, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee and Texas. Chapter 13 debtors in these states also had much lower median incomes than Chapter 13 debtors in other states.

Researchers didn’t look at every state in detail, but they did more closely examine the Western District of Tennessee. Discharge rates for Chapter 13 filers in black areas in the District were significantly lower than those in white areas. Among low-income debtors in black areas, the discharge rate was just 11%.

Among all Chapter 7 and Chapter 13 debtors, black filers were about 2.5 times as likely to see their cases dismissed. Repeat filings were also more common among black bankruptcy filers in the District, possibly due in part to the high rate of dismissal.

Making Bankruptcy Work for Everyone

Consumer bankruptcy is intended to give people struggling with debt the breathing room to build more stable financial futures—and to make them more active contributors to the local and national economy. But, it isn’t working equally for everyone. In fact, the current disparities often mean the people most in need of relief don’t get it.

Efforts are underway to resolve those disparities at a systemic level. For example, some elements of Senator Elizabeth Warren’s recently proposed bankruptcy reform are geared toward leveling the field. These include an end to routing debtors who can’t afford to pay in advance into Chapter 13 and making some types of debt that disproportionately impact debtors of color dischargeable.

But, it’s important to remember that whether you’re exploring bankruptcy now or in an environment where some disparities have been addressed, there’s no pre-fabricated right answer. To give yourself the best opportunity for a successful bankruptcy case and a fresh start to build on, speak with an experienced bankruptcy attorney who can assess your specific situation and recommend the best course of action for you.

Bond & Botes offers free consultations to people looking for debt solutions in Mississippi, Tennessee, and Alabama. To schedule yours, call 1-877-581-3396 or fill out the contact form on this page.