Accessing Justice in the Bankruptcy System
Last week, ProPublica and The Atlantic magazine co-published an article showing that black Americans do not fare as well in the federal bankruptcy system as their white counterparts. The article sheds journalistic light on a problem identified in earlier academic studies by . . . well, my research collaborators and me. When consumers file bankruptcy, they must make a very important choice at the outset – should they file a chapter 7 or a chapter 13? For most consumers, chapter 7 will be a better deal because they are highly likely to have their unpaid debts wiped out in what is known as the bankruptcy discharge.”
For most every consumer, chapter 13 will make sense only if they have assets, such as a house or perhaps a car, that they would lose in a chapter 7. Consumers keep their assets in a chapter 13, but they must commit to a three- to five-year plan where they must use as much of their income as they can to repay creditors. In a chapter 13, unpaid debts are wiped out only if the consumer makes all the payments under the plan. Most do not, meaning they are left in the same place they were if they had not filed bankruptcy. Deciding which chapter to choose is a complicated decision. Who knows what to do? Bankruptcy lawyers. When a consumer files bankruptcy, the lawyer plays a huge role in deciding which chapter is used.
Lawyers have a stake in the decision. First, the average chapter 13 fee is $3,500 as compared to $1,100 for a chapter 7. Second, because of the way bankruptcy law works, attorneys will want to be paid upfront in a chapter 7, but the attorney fee can be paid over time in a chapter 13 plan. Can’t afford that chapter 7 fee? Your attorney can offer a convenient payment plan called a chapter 13. Blacks are twice as likely to file chapter 13 than debtors of other races. The ProPublica article puts faces on that disparity by focusing on bankruptcy filers in Memphis, Tennessee, but also finds the same disparity in many places across the country. Well-documented income and wealth gaps for black Americans might explain the disparity, but our studies find the disparity persists even after statistically controlling for financial and other variables. The original data came from 2007, and we recently replicated this analysis with more recent data.
Perhaps more revealing, we sent hypothetical fact patterns to consumer bankruptcy attorneys from across the country. If the fact pattern suggested the clients were black, the attorneys were more likely to recommend chapter 13. When asked about their attitudes toward their hypothetical clients, the attorneys rated black clients who expressed an interest in chapter 7 lower than black clients who expressed an interest in chapter 13. In a separate study, we found how attorneys get paid play a major role. Black consumers are much more likely to find themselves in “no money down” chapter 13 cases where nothing is paid to the attorney before the case.
The bottom line is that when blacks turn to the bankruptcy system for help, they are much more likely to find themselves in a more expensive and longer process that is less likely to relieve them from a crushing debt load. The fresh start for the honest but unfortunate debtor that American bankruptcy law has historically promised its citizens is unavailable. Black bankruptcy debtors find themselves less forgiven for their debts than their white counterparts. Changes to the rules in how attorneys get paid would help shrink the disparity, but more attention is needed to the problem. Nearly a million people turn to the bankruptcy system each year. It needs to offer not just the promise but the reality of equal justice for all.