A tale of two debtors: bankruptcy disparities by race.

AuthorVan Loo, Rory

    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 get subprime mortgages as are residents in low-income white neighborhoods. (11) Scholars have also posited that the type of relief offered by bankruptcy laws favors white debtors over black debtors, since whites disproportionately own the type of assets that bankruptcy protects, and blacks disproportionately have the types of debts that bankruptcy does not relieve. (12) This would leave minority debtors who obtain relief worse off than white debtors who obtain relief. Thus, the literature offers a picture of different races before and after bankruptcy. The data presented in this paper begin to tell the story of what happens to minority debtors while they are in bankruptcy--which chapter they choose and what happens to them while they are pursuing a discharge of their debts in Chapter 13.

    This paper thus informs the relationship between bankruptcy and race and, as such, fleshes out some larger issues surrounding race and the law. Until now, that debate lacked empirical information about what happens to different races once in bankruptcy. It also lacked any clear assertion that race played a role in whether a debtor received a discharge. Indeed, much of the criticism of "raced" bankruptcy laws seemed understandably premised on the assumption of equal availability of a discharge. (13) The data offered in this paper refute that assumption.


    The data for this paper comes from the 2001 Consumer Bankruptcy Project, whose final completion rates for Chapter 13 cases only recently became available because a significant portion of the multi-year Chapter 13 repayment plans were not completed until 2006 and 2007.

    The Chapter 13 database used in this paper has a core sample of 978 debtors, while the Chapter 7 database has 801 debtors. (14) The information about these debtors came from two principal information sources. First, debtors received questionnaires at their mandatory meetings with creditors. (15) These questionnaires asked for demographic information such as race, level of education, and whether the debtor owned a home and was employed. (16) Then, coders collected data from the corresponding public court records. (17) These records supplied additional information about income, bankruptcy outcome, and motions made against the debtor in court.

    Overall, 69.1% of blacks who entered bankruptcy in 2001 eventually obtained a discharge, compared to 87.5% of whites. (18) Part of this is explained by the fact that blacks chose Chapter 13 with much higher frequency than did whites and Hispanics: of those debtors choosing Chapter 7 and Chapter 13 bankruptcy, 61.8% of blacks chose Chapter 13, compared to 29.4% of Hispanics and 20.5% of whites. (19)

    Yet an analysis of this data also revealed a discrepancy among debtors only entering Chapter 13. Significantly fewer blacks and Hispanics who entered Chapter 13 left with a successful discharge of debts, even controlling for the influence of income, education, and employment. Whereas, 28.3% of all whites entering bankruptcy obtained a discharge, only 19.8% of blacks and 19.4% of Hispanics did. (20) In other words, merely being black lowers the odds of getting a discharge by 40%, and being Hispanic lowers the odds by 43%. (21)


    Even after a judge approves the debtor's proposed repayment plan, and thus gives the court's seal of approval for feasibility, the disparity still exists between blacks and whites. Of whites who had their plans confirmed, 39% wound up receiving a discharge, compared to 28.6% of blacks, again even after controlling for income, homeownership, education, and employment. (22) Hispanics who had their plan confirmed had a completion rate of 27.7%. (23)


    There are a number of possible contributors to the difference in completion rates. The discussion below focuses on the difference in completion rates within Chapter 13, rather than the choice between chapters, because the Consumer Bankruptcy Database offered a broader explanation for the Chapter 13 differences.

    As far as the differences in completion rates within Chapter 13 are concerned, data and common-sense point to three principal explanatory avenues. The first is that actors in the bankruptcy system--judges, attorneys, or otherwise--are treating whites and minorities differently. A second potential explanation is a racial bias built into the Chapter 13 laws. Finally, there is the possibility that social factors, independent of debtors' socioeconomic status, offer less support to minorities, such as through inadequate representation.

    1. Bankruptcy Actors

      One explanation for the disparate completion rates is that actors in the system--such as trustees, judges, or attorneys--are treating minorities differently. This treatment is difficult to gauge because we cannot know with certainty what is going on in the minds of these actors. Thus, the discussion below is limited to those actors for whom the numbers demonstrated a difference in involvement: trustees and attorneys. (24)

      1. Trustees

        One way treatment of debtors can be measured is through the number of adversarial moves made against them by other parties. In a bankruptcy case, the strongest adversarial move to make is a motion to dismiss, which can be made by the debtor, creditors, or the trustee at any time during the bankruptcy proceedings. (25) The data on motions to dismiss support the assertion that some of the race differences in completion rates might be explained by differences in the number of motions to dismiss made by third parties. (26) The principal party making those motions was the trustee.

        A significantly higher percentage of discharged black debtors (30.3%) than white debtors (17.8%) (27) were subjected to motions to dismiss. (28) This means that on average, even successful black debtors had 12.5% more motions to dismiss made against them. Although the specific details of the motions are unknown, the difference is striking when one considers the comparable socioeconomic demographics of the groups and that such motions were made against ultimately successful debtors. Not only should these racial groups theoretically have had comparable motions to dismiss made against them, but it would also appear that any such motions to dismiss were ultimately off base because the debtors completed the plans.

        Nor can these motions to dismiss be defended on the ground that they were made to encourage the debtor to make payments. The above motions to dismiss were motions that the court actually ruled on. Moving parties can--and often do--withdraw the motions to dismiss on the day of the hearing if their intent is to prod the debtor into payment. The fact that judges actually ruled on these motions, however, suggests the trustees made the motions with intent to remove the debtor from Chapter 13.

        Because motions to dismiss can be made by many parties--mortgage holders, credit card companies, or the trustee (29)--it helps to take a closer look at who made these motions in the data set. The motions were spread out enough among different types of...

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