Chapter IV: Making Chapter 13 Work for All Stakeholders

• Jurisdiction: United States

IV: Making Chapter 13 Work for All Stakeholders

A. Chapter 13 Practice

§ 4.01 Racial Justice in Bankruptcy

(a) The empirical evidence establishes that African American bankruptcy debtors are both disproportionately more likely to file chapter 13 cases than debtors of other races and disproportionately less likely to obtain a discharge.

(b) All professionals working in the bankruptcy system should strive to ensure that all persons have equal access to justice. Nothing beyond the applicable legal standards should affect a person’s access to the bankruptcy system. No one should experience disparate treatment based on any nonlegal factor, including race, color, religion, sex, pregnancy, disability, national origin, ancestry, marital status, sexual orientation, or gender identity.

(c) Insolvency organizations should develop and widely disseminate educational and training programs that can help bankruptcy professionals reduce implicit racial bias.

(d) Congress should amend 28 U.S.C. § 159 to require both the collection of race and ethnicity information on the petition and the dissemination of that information by the director of the Administrative Office of U.S. Courts (AO).

(e) In the absence of congressional action, both the Advisory Committee on Rules of Bankruptcy Procedure and the AO should consider the feasibility and practicality of collecting race and ethnicity information about bankruptcy filers through official bankruptcy forms, with appropriate privacy protections.

Background. Numerous academic studies establish that African American debtors are overrepresented among chapter 13 filers. Over half of African American bankruptcy debtors file chapter 13 cases, compared to just over one-quarter of other filers, a disparity that remains even after controlling for factors such as assets and income.⁵¹⁷ Chapter 13 can be the better choice for some debtors, but there is no apparent reason for a racial disparity after controlling for financial and personal circumstances. Because chapter 13 is more expensive, requires repayment of income over a period of three to five years, and grants a discharge only after successful completion of the proposed payments, the racial disparity in chapter 13 filers raises concerns about equal access to justice.

Academic papers first noted the racial disparity in chapter 13 filers thirty years ago. The initial reports of racial disparity, however, were not widely noticed, likely because the racial disparity finding was a byproduct of a different research question or because the papers used procedures that limited their ability to draw statistical inferences. In a paper published in 1987, Professor Michelle White explored whether the increase in bankruptcy filings after the 1978 passage of the Bankruptcy Code was due to increases in exemptions or general economic factors. Using a data set of 75,000 cases provided by the AO, she found that the percentage of African Americans in a county increased the number of chapter 13 cases filed in that county.⁵¹⁸

As part of her pioneering work on the concept of local legal culture, Professor Jean Braucher did in-depth qualitative interviews with bankruptcy professionals in Ohio and Texas. In these interviews, two chapter 13 trustees in Ohio said they thought African Americans were overrepresented in chapter 13, with one of the trustees commenting that he was worried these debtors were “being taken advantage of.”⁵¹⁹

Several later papers, more specifically mentioning racial disparities in bankruptcy, were based on data from the long-running Consumer Bankruptcy Project (CBP).⁵²⁰ In a study using 2001 data from the CBP and using households as the unit of analysis, Professor Robert Chapman stated that over half of the African American debtors in the data filed for chapter 13.⁵²¹ In a study based on the same 2001 data, Professor Rory Van Loo explored racial disparities in bankruptcy discharge rates. As part of that study, he found that 61.8% of African Americans “chose Chapter 13, compared to 28.4% of Hispanics and 20.5% of whites.”⁵²²

As technology changed, it became easier for researchers to create data sets that allowed for more robust statistical techniques. These techniques built on the earlier findings; evidence accumulated that the racial disparity in bankruptcy chapter choice in prior work was not an artifact of the earlier research designs. Professors Jean Braucher, Dov Cohen, and Robert Lawless used the nationally representative 2007 CBP data to explore more fully the overrepresentation of African Americans in chapter 13. They found that 54.7% of African American bankruptcy filers were in chapter 13, compared to 28.2% of filers of all other races.⁵²³ The differences remained even after regressions that statistically controlled for (1) legal and financial variables such as attorney representation, income, and assets; (2) prebankruptcy workout efforts such as attempts to consolidate debts, attempts to “work with” creditors, and attempts at refinancing; (3) demographic variables such as educational level, occupational prestige, and number of dependents; and (4) the rate at which non-African Americans filed under chapter 13 in the district.⁵²⁴ After controlling for these variables, the regressions estimated an African American bankruptcy filer was about twice as likely to be in chapter 13 compared to a similarly situated debtor of another race.

Braucher, Cohen, and Lawless also sent an experimental vignette to a random sample of consumer bankruptcy attorneys. The vignette described a couple who had come to an attorney for bankruptcy advice. The researchers designed the vignette to be a close question as to whether chapter 7 or chapter 13 was a better choice. The responding attorneys, without being told, each received one of several different versions of the vignette. In one version, the clients had names and church denominations that were stereotypically African American, while another version included stereotypically white names and church denominations. There also was a control group for which the vignette used only initials and gave no cues about the likely race of the client. Different versions also specified whether the clients stated a preference for chapter 7 or chapter 13 or, as a control condition, the clients did not state a preference.⁵²⁵

If the attorney had received a vignette with stereotypical African American names, the attorney recommended a chapter 13 filing 47% of the time while recommending that chapter only 36% of the time for the control condition and only 32% of the time if the vignette had stereotypical white names.⁵²⁶ Moreover, attorneys were more likely to override the stated preference of the client to file chapter 7 if the vignette used the stereotypical African American names.⁵²⁷ Attorneys also viewed the fictitious African American couple as being more “competent” and having “good values” if the couple had expressed a preference for chapter 13 but had the opposite reaction for the fictitious white couple.⁵²⁸

Cohen and Lawless were joined by Faith Shin in a partial replication of their earlier work using 2013-15 data from the CBP. Again, African American bankruptcy filers were in chapter 13 at higher rates (55.0%) than persons of other races (26.3%).⁵²⁹ The differences again remained even after regressions controlling for legal and financial variables, prebankruptcy workout efforts, demographic information, and the overall chapter 13 rate in the district.⁵³⁰ Cohen, Lawless, and Shin also gave consumer bankruptcy lawyers a survey asking them to make estimates about bankruptcy chapter choice. The attorneys overestimated the propensity of whites to file chapter 13, guessing that 46.3% of the time they filed chapter 13, compared to the real-world rate at the time of the survey of 28.6%. At the same time, they underestimated the propensity of African Americans to file chapter 13, stating that the rate was 22.0%, compared to the real-world rate of 54.6%.⁵³¹ Attorneys also made large overestimates for homeowners and large underestimates for prior bankrupts. In the authors’ words:

The attorney estimates appear to line up with American stereotypes of who is a responsible person. Attorneys see homeowners and whites as more likely to attempt repayment to creditors through chapter 13 whereas they see African Americans and prior bankrupts as more likely to seek a full discharge in chapter 7. There is no reason to think that attorneys, as a group, should not hold prevailing American cultural biases about who is a responsible person. That the attorneys are the system’s insiders and have a front-row seat to witnessing a 2:1 racial disparity is not enough to overcome the bias. ⁵³²

Professor Edward Morrison and Antoine Uettwiller used a data set from Cook County, Illinois, to explore the relationship between the overrepresentation of African Americans in chapter 13 and parking fines. They find that in Cook County, African Americans not only are overrepresented among chapter 13 filers but also are overrepresented among bankruptcy filers with more than $500 of government fines.⁵³³ Because governmental fines are dischargeable in chapter 13, Morrison & Uettwiller observe that such filers have a greater incentive to choose chapter 13. After excluding African Americans with more than $500 in governmental fines, the disparity in chapter choice remains but is “substantially smaller.”⁵³⁴ In a working paper, Morrison & Uettwiller joined Belisa Pang to look at African American debtors in Atlanta, Chicago, and Memphis. They find that African Americans with longer commuting times in those three cities are more likely to file chapter 13.⁵³⁵ Using a subset of their data for Chicago only, they find that the beginning of more aggressive parking enforcement and fines was more likely to lead to an increase in chapter 13 filings in zip codes with predominately African American residents. They summarize this line of research as saying, “Among those...