Race, Attorney Influence, and Bankruptcy Chapter Choice

• Author: Robert M. Lawless,Dov Cohen,Jean Braucher
• Published date: 01 September 2012
• Date: 01 September 2012
• DOI: http://doi.org/10.1111/j.1740-1461.2012.01264.x

Race, Attorney Influence, and Bankruptcy

Chapter Choicejels_1264393..429

Jean Braucher, Dov Cohen, and Robert M. Lawless*

We report on racially disparate uses of Chapter 13 bankruptcy. Currently, approximately

1,500,000 bankruptcy petitions are filed each year, with about 30 percent of those petitions

being Chapter 13 cases. Although Chapter 13 can offer some legal advantages for persons

seeking to protect valuable assets such as a house or automobile, it generally offers less relief

and costs more than the primary alternative available to consumers, Chapter 7. The chief

feature of a Chapter 13 bankruptcy case is a plan under which the debtor must devote all his

or her disposable income to creditor repayment over a three- to five-year period. Chapter 7,

in contrast, requires only that the debtor turn over all nonexempt assets, with over 90

percent of Chapter 7 debtors having no assets to turn over. This article reports on two

studies, one using data from actual bankruptcy cases and the other involving an experiment

with a national random sample of bankruptcy attorneys. Because the court system does not

collect racial data on bankruptcy filers, the first study uses data from the Consumer Bank-

ruptcy Project. Even after controlling for financial, demographic, and legal factors that

might favor a Chapter 13 filing, African Americans are much more likely to file Chapter 13,

as compared to debtors of other races. The second study reports on an experimental

vignette sent to a random sample of consumer bankruptcy attorneys who represented

debtors. The attorneys were more likely to recommend Chapter 13 when the hypothetical

debtors were a couple named “Reggie & Latisha,” who attended an African Methodist

Episcopal Church, as compared to a couple named “Todd & Allison,” who attended a United

Methodist Church. Also, attorneys viewed “Reggie & Latisha” as having better values and

being more competent when they expressed a preference for Chapter 13 as compared to

“Todd & Allison,” who were seen as having better values and being more competent when

they wanted to file Chapter 7, giving them a “fresh start.” Previous research and the results

from the present experimental vignette study suggest that consumer bankruptcy attorneys

may be playing a very important, although likely unintentional, role in creating the racial

disparity in chapter choice. Together, the two studies raise questions about the fairness of

the bankruptcy system.

I. Introduction

This article documents racial sorting in the U.S. bankruptcy system. Put simply, African

Americans disproportionately use a type of bankruptcy that requires greater repayment of

debt, costs more in legal fees, and takes longer. Moreover, based on an experimental study

*Address correspondence to Robert M. Lawless, Professor of Law, University of Illinois College of Law, 504 E.

Pennsylvania Ave., Champaign, IL 61820; email: rlawless@illinois.edu. Braucher is Roger C. Henderson Professor of

Law, University of Arizona; Cohen is Professor of Psychology, University of Illinois.

Journal of Empirical Legal Studies

Volume 9, Issue 3, 393–429, September 2012

bs_bs_banner

393

done with a national random sample, consumer bankruptcy attorneys appear to be guiding

African Americans into this option. Approximately 2 million people per year enter the U.S.

bankruptcy system, and their race seems to be an important factor in determining whether

they receive total forgiveness of their debt or whether they are required to repay it either

partially or in full.

Although our study focuses on the probable role of debtors’ lawyers in guiding clients

differently based on race, it is important to note that many others have an oversight role and

have allowed this racial disparity within the bankruptcy system to occur. We have no

evidence one way or the other about whether other actors contribute to the disparity by the

way they play their roles, something that deserves study. These others include bankruptcy

judges, other federal judges, officials in the U.S. Department of Justice who oversee bank-

ruptcy trustees, and standing bankruptcy trustees around the country. We doubt that our

data result from a conscious, coordinated, or explicit effort by actors in the system to create

racially discriminatory outcomes; rather, we think that subtle biases operating within a

complex system allow such racial sorting to occur.

The specific type of racial sorting documented in this article has to do with what

bankruptcy specialists call “chapter choice.” An individual bankruptcy filer, usually advised

by an attorney, may choose from several substantively different options, referred to as

“chapters.” Although specialized chapters are available for family farmers (Chapter 12) and

“high-wealth” individuals (Chapter 11), filings under these chapters are relatively uncom-

mon. For the typical consumer bankruptcy filer, chapter choice comes down to a decision

between Chapter 7 and Chapter 13.

The differences between Chapter 7 and Chapter 13 are dramatic (Administrative

Office of U.S. Courts 2010). A Chapter 7 proceeding usually involves a relatively quick

discharge of most debts. In theory, it may also involve liquidation of the debtor’s assets, as

the debtor turns over assets to a bankruptcy trustee who then sells the assets and distrib-

utes the proceeds to creditors. In practice, however, more than 90 percent of all Chapter

7 debtors have no assets to liquidate either because of legal protections that leave the

debtor with a minimal amount of assets (known as exemptions) or because the debtor has

pledged all of his or her assets as collateral (putting the assets beyond the reach of the

bankruptcy trustee) (Jiménez 2009). Chapter 7 filers typically receive a discharge within

six months of filing, and very few of them see the inside of a courtroom. In practice,

Chapter 7 seems to maximize the ideal of forgiveness, giving “the honest but unfortunate

debtor...anewopportunity in life and a clear field for future effort, unhampered by the

pressure and discouragement of pre-existing debt”(Local Loan Co. v. Hunt, 292 U.S. 234,

245 (1934)).

In contrast, Chapter 13 filers must devote all their disposable income to a three- to

five-year repayment plan for creditors. The bankruptcy discharge typically is granted only

after the completion of all payments under the Chapter 13 plan, but it is estimated that only

about one-third of all Chapter 13 filers manage to complete the repayment plan (Norberg

& Velkey 2006:476; Whitford 1994:411). In addition to a less generous and lengthier

proceeding, Chapter 13 also costs more than Chapter 7. It is not uncommon for attorneys

to charge $2,500 to $3,000 for a Chapter 13 but only $1,000 for the less-complicated

Chapter 7 (U.S. Government Accountability Office 2008).

394 Braucher et al.

Given the apparent financial disadvantages to the debtor, a fair question is why

anyone ever files Chapter 13. There are several reasons. First, Chapter 13 offers some legal

advantages that can be used to allow debtors to keep possession of property such as a home

or an automobile. It is widely believed among consumer bankruptcy specialists that a

client’s desire to save a home is the most common reason for filing Chapter 13 because

Chapter 13 offers certain advantages such as the ability to make up arrearages over time

(Porter 2011). A second reason that Chapter 13 might be preferred is that although the

attorney fees are higher, the fees can be paid over time through the Chapter 13 plan

whereas lawyers usually require that clients come up with cash in advance for the fees for a

Chapter 7 case. Also, legal requirements can push debtors into Chapter 13. The much

discussed 2005 amendments to the U.S. bankruptcy law were largely devoted to requiring

more debtors to file in Chapter 13, although empirically these amendments do not as of yet

seem to have had this effect (Lawless et al. 2008). Finally, some debtors might file Chapter

13 out of a sense of moral obligation, repaying creditors as much as they can afford rather

than choosing Chapter 7. Altogether, Chapter 13 is more intended to fulfill the ideals of

repayment to creditors and “reform” of debtors (through the imposition of a more frugal

lifestyle, prudent budgeting, and court supervision), as compared to the forgiveness and

fresh start ideals of a Chapter 7 (Dixon & Epstein 2002).1

This article reports on two studies documenting racial sorting in bankruptcy chapter

choice. Study 1 uses real-world data from a national random sample of bankruptcy cases to

document a much higher incidence of Chapter 13 use among African Americans as

compared to other races. For a debtor with median characteristics, an African American is

about twice as likely to file Chapter 13 as compared to debtors of all other races, even after

controlling for a multitude of financial, demographic, and legal factors. Study 2 reports an

experimental vignette survey using a national random sample of consumer bankruptcy

attorneys, and it shows that attorneys are more likely to recommend that a fictional “Reggie

& Latisha” file Chapter 13, as compared to a fictional “Todd & Allison.” These attorneys also

generally held more positive views of “Reggie & Latisha” if they expressed an initial

preference for repaying their debts through Chapter 13, whereas they held more positive

views of “Todd & Allison” when they preferred to make a fresh start with Chapter 7. That

is, Reggie and Latisha were judged to be competent people of good values when they

wanted to make up for their debts of the past, whereas Todd and Allison were judged to be

competent people of good values when they wanted to wipe the slate clean and make a new

start on their life.

II. Literature Review

Although the U.S. Constitution demands that Congress pass only uniform laws of bank-

ruptcy, courts and lawyers can apply the federal Bankruptcy Code with wide variations. One

1With respect to repayment of creditors, a debtor may choose Chapter 13 only if his or her creditors would receive

at least as much money under a Chapter 13 as under a Chapter 7 (11 U.S.C. § 1325(a)(4)).

Race, Attorney Influence, and Bankruptcy Chapter Choice 395