A tale of two debtors: bankruptcy disparities by race.

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A tale of two debtors: bankruptcy disparities by race.

I. INTRODUCTION

Legal policy has long struggled with the issue of official neutrality in the face of racially disparate results. While the days of laws explicitly discriminating against people of color may be gone, the legal system as a whole has not attained perfect race neutrality. Scholars have offered evidence of this tension in disparate spheres such as criminal justice, employment, and education. This paper adds to that history by offering evidence of racial difference in the court system in an area in which such differences had not been posited before: bankruptcy filings. Such an addition to the debate is particularly timely given the current credit turmoil and heightened prominence of bankruptcy as a societal actor.

When it amended the Bankruptcy Code ("the Code") in 2005, Congress sought to curb perceived debtor "abuse" of bankruptcy laws by pushing more debtors out of Chapter 7 and into Chapter 13. (1) The amendments thus deny some debtors Chapter 7's immediate and almost automatic (2) cancellation of debts, and instead thrust them into a Chapter 13 that requires the debtor to make exacting payments to creditors over a period of up to five years. (3) In so doing, Congress may have exacerbated racial disparity in bankruptcy relief.

The data from this paper suggest that minorities who enter bankruptcy are far less likely than whites to receive a bankruptcy discharge. Part of this is simply because of the choice that debtors make. Black debtors, for example, are three times more likely to choose Chapter 13 than are white debtors. (4) Because the overall relief rate was only 23% for Chapter 13, (5) this means that blacks are disproportionately denied relief based on the bankruptcy chapter they choose.

More worrisome is that the empirical data in this paper suggest that once minorities enter Chapter 13, they obtain bankruptcy relief far less often than do whites--the odds of a discharge are 40% lower for black or Hispanic debtors as compared to white ones, even after controlling for income, education, and employment. (6) In other words, Congress's recent amendments (7) have made it so that some minority debtors will no longer have the option of an immediate Chapter 7 discharge in which all races fare the same, (8) and must instead enter a long-term payment Chapter 13 in which their race may be a determining factor in whether they ever get a successful discharge.

A numbers-based discussion of minority debtors' likelihood of relief is new to bankruptcy scholarship, and fills in the middle part of the three-part story of race in bankruptcy law. (9) Scholars have already shown that black and Hispanic families are far more likely to enter bankruptcy than are white families. (10) At least one critical factor in this seems to be predatory lending practices: even residents in high-income, predominately black neighborhoods are more than twice as likely to...

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