(This article originally appeared in the Wall Street Journal)
Black People Are More Likely to File for Personal Bankruptcy, Choose Repayment Option
By Aisha Al-Muslim
June 7, 2021 5:30 am ET
Lenasha Maloy, a nursing assistant from Tulsa, Okla., filed for bankruptcy three times before she got what she needed—a court order saving her home from foreclosure.
Ms. Maloy won the court order in 2019 after she met bankruptcy requirements and provided documentation so she could secure relief from the debt she had accumulated from overdue mortgage payments. Ms. Maloy lapsed from making monthly payments after she became the caretaker of her chronically ill parents and took on some of their medical debt.
Black people in the U.S. with debt like Ms. Maloy are more likely to file for bankruptcy protection, if they can afford to pay for the cost of filing, than any other racial group, according to studies, researchers and legal experts. The reasons for filing range from trying to keep their cars to getting rid of parking tickets. Such individuals also are twice as likely among all bankruptcy filers to pick a more costly type of personal bankruptcy, known as chapter 13, studies show.
These patterns have created a situation where Black people pay more for bankruptcy, yet are less likely than other households to benefit from the longer process, researchers say.
As government aid extended during the pandemic eases, more people of color are expected to face financial distress due to the loss of wages, unemployment or high medical bills, economists and bankruptcy lawyers say.
“The racially disparate impact of bankruptcy and the uneven number of filings shows that this pandemic is also having a heavy impact on the finances of Black and Brown Americans,” said Sen. Chris Coons (D., Del.).
Black People More Likely to File for More Expensive Bankruptcy Option, Experts Say
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The main issue, researchers and legal experts say, is the prevalence of racial inequalities affecting personal bankruptcies, a system that is intended to offer debt relief to those in deep financial distress. Bankruptcy trustees, appointed to collect payments from debtors and make distributions to creditors, say that the letter of bankruptcy laws are race neutral and view consumers equally. The federal court system doesn’t collect demographic information—such as race, gender and age—leaving researchers to analyze national bankruptcy trends by using ZIP Codes, census data for individual court districts and surveys.
Researchers say disparities in the outcomes among chapter 13 filers—after controlling for factors, such as a prior bankruptcy history, assets, income, debt and legal issues—highlight biases in the legal system. Further, inequity in housing, employment, banking, healthcare, criminal justice, and other aspects of society also contribute to a higher percentage of Black people needing bankruptcy protection.
“As long as there’s structural, systemic racism in society, those drivers will continue to push people of color into the bankruptcy system, and they will still be worse off than their white counterparts,” said David G. Peake, a chapter 13 trustee in Houston.
Black people who have filed for chapter 13 bankruptcy are less likely to obtain a discharge of their debt, according to a report from the American Bankruptcy Institute’s Commission on Consumer Bankruptcy. Still, they choose to consolidate and restructure their debt under chapter 13, so that they can repay on an installment basis while retaining possession of their homes, cars and other assets.
Still, the most popular option for those seeking personal bankruptcy protection is chapter 7 liquidation, a process in which debtors often give up any assets they may have, such as homes and cars, to pay creditors. Chapter 7 allows them to get rid of debts, such as credit card bills, and doesn’t require filing a repayment plan. Most chapter 7 debtors have no assets to offer up, said Robert Lawless, a professor at the University of Illinois College of Law, who also served as the reporter for ABI’s commission on consumer bankruptcy.
The chapter 13 process for an individual can cost on average around $3,000 to $4,000 in total, while filing for chapter 7 typically totals about $1,200 or more upfront in one lump sum, Mr. Lawless said. Chapter 13 costs more as it can take three to five years to resolve compared with a chapter 7 filing, which can be completed in around six months.
Ms. Maloy’s repayment plan won through the third case allows her to pay $1,900 a month toward her current mortgage of $900 and the rest for missed payments.
Ms. Maloy says she has spent at least $12,000 on the three bankruptcy filings and attorneys’ fees.
She also faced hurdles that added delays to an already lengthy process. When Ms. Maloy’s original lawyer became sick, the first chapter 13 bankruptcy case that she filed in 2016 was transferred to another attorney.
“He always just kind of talked down to me,” Ms. Maloy said of the second attorney, adding she didn’t get educated on the process. “I kind of got really discouraged.”
Ms. Maloy’s case was eventually dismissed the first time for a failure to make required payments. The second time, her case was dismissed for missing documentation.
Her repayment plan won through the third case allows her to pay $1,900 a month toward her current mortgage of $900 and the rest for missed payments.
Part of the reason Black people turn at higher rates to chapter 13—considered the “no money down” option—is because they are less likely to have personal savings, home equity or other options to pay for the filing cost of bankruptcy, trustees and lawyers said. These filers can pay their lawyers over time through monthly payments, and get a stopgap financial solution until a tax refund arrives or they find a better job, the lawyers said.
Sometimes, they are steered to pick a chapter 13 filing by lawyers, according to researchers and consumer advocates.
“Attorneys drive people’s chapter choice,” said Pamela Foohey, a professor at the Indiana University Maurer School of Law.
Researchers at the University of Illinois and the University of Arizona found during an experiment with a hypothetical couple named Reggie and Latisha—statistically more likely to be Black American names—and Todd and Allison—statistically more likely to be names of white Americans—that lawyers were more likely to recommend chapter 13 to “Reggie and Latisha” than to “Todd and Allison,” Mr. Lawless said.
Sen. Elizabeth Warren (D., Mass.) and House Judiciary Committee Chairman Jerrold Nadler (D., N.Y.), along with other Congressional Democrats, introduced legislation in December to address racial and gender disparities in the U.S. bankruptcy system.
The proposal would fix the chapter choice problem by proposing the creation of a new option called chapter 10, while getting rid of chapter 7 and chapter 13, among other suggestions. The legislation would also waive filing fees for individuals with incomes at or below 150% of the federal poverty line and then graduating fees based on income. It also ends the pre credit counseling requirement.
Such legislation would be timely. Nearly half of the Black women surveyed cited the pandemic as a reason for filing personal bankruptcy in January this year compared with nearly 21% in April 2020, according to a report from Upsolve, a nonprofit startup that offers a bankruptcy-filing tool.
Job loss is among the primary drivers of personal bankruptcies, as previous downturns have shown. Filers say they face both personal and social trauma from going through the experience.
Chrystal Tate Bledsoe, of Jackson, Miss., filed for bankruptcy two times within a decade, and in both of those instances she chose chapter 13 so she could keep her house. She first filed for chapter 13 in 1999 when she lost her job because the telecommunications company where she worked went bankrupt and again in 2009 when she was let go during the recession.
“Big companies file for bankruptcy all the time, they reorganize and they’re never ostracized about it,” said Ms. Bledsoe, now a quality assurance engineer for an information technology company, referring to the stigma associated with seeking personal bankruptcy that she says is more prevalent in the Black community. “It’s looked down upon until you talk to someone [such as a lawyer] who enlightens you.”