Race, Attorney Influence, and Bankruptcy Chapter Choice

Abstract

We report on racially disparate uses of chapter 13 bankruptcy. Currently, approximately 1,500,000 bankruptcy petitions are filed each year, with about 30% 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 of his or her disposable income to creditor repayment over a 3- to 5-year period. Chapter 7, in contrast, requires only that the debtor turn over all nonexempt assets, with over 90% of chapter 7 debtors having no assets to turn over.

This paper 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 Bankruptcy 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 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.

Keywords: bankruptcy, chapter 13, local legal culture, race