Opposite of Correct: Inverted Insider Perceptions of Race and Bankruptcy

Abstract

Previous data collected during the 2007 meltdown of the subprime mortgage market showed that African Americans were approximately twice as likely to file chapter 13 bankruptcy than persons of other races, a significant policy issue given the generally less generous rules in chapter 13. We first update and replicate these findings with new data collected during 2013‐2014 as the housing market recovered. Results of the original study were not specific to the subprime crisis as the new data showed the same 2:1 racial disparity as the older data, suggesting that this disparity may be a relatively enduring part of the U.S. bankruptcy system.

To see if insiders were aware of this disparity, we sent surveys to a national random sample of consumer bankruptcy attorneys. They seemed to believe there was a racial disparity in bankruptcy, but they had the disparity exactly backwards. A majority (about 60%) believed that whites were twice as likely to file chapter 13 when it is actually African Americans who are twice as likely to do so. We also report on a convenience sample of respondents from Amazon Mechanical Turk. These respondents have little or no knowledge of the U.S. bankruptcy system but likely hold common American stereotypes about which groups tend to be responsible or irresponsible. Their responses were largely similar to those of bankruptcy professionals. Overall, Mechanical Turk respondents were slightly more accurate than bankruptcy professionals. The likely reason is that Mechanical Turk respondents stuck more closely to the national base rate.

Across all studies, it seems that those inside the bankruptcy system have little knowledge of the racial disparities that exist within it. Instead, they rely on common American stereotypes about who are responsible or irresponsible citizens.

Keywords: bankruptcy, chapter 13, race, base-rate neglect

JEL Classification: K35