Race and Bankruptcy: Explaining Racial Disparities in Consumer Bankruptcy

Abstract

African American bankruptcy filers are more likely to select Chapter 13 than other debtors, who opt instead for Chapter 7, which has higher success rates and lower attorney fees. Prior scholarship blames racial discrimination by bankruptcy attorneys. We present an alternative explanation: Chapter 13 offers benefits, including retention of assets such as cars and driver's licenses, that are more valuable to African American debtors because they have relatively long commutes. We take advantage of a 2011 policy in Chicago, which suspended driver's licenses of consumers with large traffic-related debts. The policy produced a large increase in Chapter 13 filings, especially by African Americans. Two mechanisms explain the disparate racial impact: African Americans were more likely to have traffic-related debts and they incurred greater costs from license suspension due to their relatively long commutes. When we match African Americans to other debtors with similar commutes, we find no racial difference in the propensity to file for Chapter 13. These findings suggest that racial disparities in bankruptcy reflect racial disparities in commuting.

Keywords: Bankruptcy, Race, Chapter 13, Household Financial Fragility

JEL Classification: D14, D12, G33, K35, R20