Abstracted from: Rory Van Loo, A Tale of
Two Debtors: Bankruptcy Disparities by Race, 72 Albany Law Review
231 (2009)
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. The
amendments thus deny some debtors Chapter 7's immediate and almost
automatic cancellation of debts, and instead *232 thrust them into a
Chapter 13 that requires the debtor to make exacting payments to
creditors over a period of up to five years. 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. Because the overall relief
rate was only 23% for Chapter 13, 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. In other words,
Congress's recent amendments 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, 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. Scholars have
already shown that black and Hispanic families are far more likely
*233 to enter bankruptcy than are white families. 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. 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. 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. The data offered in this paper
refute that assumption.
. . .
More information about racial disparities and accompanying attention
is a key step toward remedying the problem, not just in bankruptcy,
but in other areas of the law. If more attorneys knew of the racial
differences, they might put more resources toward pro bono
representation or attorney education. If more judges were aware of
the differences, they might be quicker to conscript attorneys to
help the unrepresented or to discipline poor attorneys. *253 If
trustees knew of the differences, they might intervene on behalf of
debtors more often.
One way to generate more information and thus attention about the
issue would be to require districts to collect and annually report
racial data. In bankruptcy, this would mean reporting the number of
filings, which chapter those filings were in, how many motions of
what kind were made, and each plan's outcome.
This data would make it possible to conduct further studies on key
areas such as the causes of motions. For example, one helpful source
of information would be how many days late the payments were before
the trustee made the motion to dismiss. If the motions are for
payments late by an average of forty days for whites and twenty-five
days for blacks, it would suggest actor bias. If, on the other hand,
the days are comparable, it would suggest independent social factors
are playing a larger role.
Moreover, because a few trustees are involved in many cases, future
studies should look at the role of individual trustees. Studies
could examine whether some trustees consistently make motions with
the same frequency regardless of the debtor's race, whereas other
trustees consistently make more motions only for certain races. An
investigation into certain trustees who consistently demonstrate
more aggressive pursuit of minorities than whites would not only
provide information, but could also spotlight any problematic actors
in the bankruptcy machinery.
It would also be helpful to investigate why blacks and Hispanics are
less likely to be represented, and if there are any differences in
the quality of attorney representation between the races. One cause
of the disparate percentages of representation could be that
bankruptcy attorneys do not advertise to minority communities as
often as they do to white communities. Advertising has been found to
play a critical role, especially for certain segments of the
population, in access to legal services.
*254 V. Conclusion
This paper has put forth data about outcomes for debtors of
different races, and possible explanations for such data. It would
be irresponsible to charge racism of any bankruptcy institution or
actors at this point. What the above numbers do suggest, however, is
that the problem of racial disparity in the court system extends
further than was evidenced before. Furthermore, there is a great
need to look more deeply into racial disparity in bankruptcy,
especially in Chapter 13. Chapter 13 has long received less
attention from scholars than Chapter 7 or Chapter 11 and is poorly
understood even by many experts in the field. Minority debtors are
far less likely to obtain a Chapter 13 discharge even when
controlling for factors such as income, employment, homeownership,
and education. BAPCPA will only exacerbate this problem by removing
for many debtors the option of entering a clearly race-neutral
Chapter 7, and by introducing arguably minority-unfriendly
definitions of allowable expenses.
But there is also good news that comes with awareness of this
particular danger. Greater awareness of the problem is the first
step toward the attention necessary to remedy it. In bankruptcy,
solving the problem would also serve a broad set of interests.
Creditors would benefit from a system that does not reject what
could otherwise be successful minority debtors from Chapter 13,
since those debtors would otherwise pay back a larger portion of
their debts over the repayment period. Judges, lawyers, and other
bankruptcy actors would benefit from changes that would maintain the
viability and integrity of the system. Finally, and most
importantly, the changes would make a difference in the lives of
many minorities by ensuring them equal opportunity for a fresh start
when their lives are turned upside down by unpredictable events--an
opportunity vital to their full participation in the risk-laden
American economy.
It is also good news that there is no evidence that any of this is
intentional; Congress, for example, surely wrote BAPCPA thinking it
was race-neutral. Nor are the various actors--whether bankruptcy
lawyers in their choice of advertising, or trustees in their
motions--necessarily aware of the racially disparate impact of
bankruptcy laws. Before the data from this study was available,
those parties had an understandable excuse of a veil of darkness.
Consequently, as this veil is lifted, there is reason to believe
that decision-makers will take steps to ensure that the ladder out
of *255 indebtedness is not being unfairly knocked from underneath
minority debtors.
What veils of darkness remain elsewhere in the legal system are
unknown. But given the feasibility of collecting information on race
in other areas of the law and the light that such information sheds
on race in bankruptcy, there is reason to look for other areas of
the law in need of spotlights. And just as the racially charged
images following Hurricane Katrina raised awareness and directed
resources toward lessening racial challenges facing communities such
as New Orleans, such spotlights could similarly direct resources
toward lessening racial differences in the legal system as a whole.
. Consultant, McKinsey & Co. J.D., 2007, Harvard Law School. Editor,
Harvard Law Review, 2005-2007.
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