A recent study indicates that African Americans are about twice as likely as other races, in particular whites, to be steered into bankruptcy filings that do not fully benefit them. The study, “Race, Attorney, Influence, and Bankruptcy Chapter Choice” printed in the Journal of Empirical Legal Studies was conducted by Jean Braucher of the James E. Rogers College of Law at the University of Arizona, Dov Cohen of the University of Illinois and Robert M. Lawless of the University of Illinois College of Law. The New York Times reports that “lawyers are disproportionately steering blacks into a process that is not as good for them financially”. According to Braucher, Cohen and Lawless, “African Americans were about twice as likely as debtors of all other races to file chapter 13 as opposed to chapter 7. ” Their study found that although their test subjects had the same financial facts as well as legal implications, “attorneys were more likely to recommend that an African-American couple (suggested by names and other indicators) file in chapter 13 than they were for a white couple. “
In a consumer bankruptcy there are two main options: Chapter 7 and Chapter 13. The Bankruptcy Code captions Chapter 7 as a “liquidation” of all debts. Chapter 7 is particularly recognized for wiping out unsecured debts such as credit cards, medical bills, payday loans, repossessions, or any other debts not tied to a physical asset. When someone files a Chapter 7 bankruptcy they are awarded a quick (process only takes on average 4 months) fresh financial start, in which they are freed of personal liability on most, if not, all old debts. Although Chapter 13 is perceived as the best route to hold on to collateral such as a home or car, the reality is that chapter 7 debtors who are or who can become current on any financed asset can also do so. This procedure does not involve a repayment plan and for the most part chapter 7 fees are much lower.
On the other hand, Chapter 13 involves a three-to-five year repayment plan, with the discharge being awarded once the plan has been completed. People choose chapter 13 for a variety of reasons including saving a home from foreclosure, preventing the repossession of a vehicle, paying back government debts such as back-taxes, unemployment overpayment, child support arrearage, etc. In Chapter 13 bankruptcies, debtors can either cram down secured debts to market/collateral value or strip off supporting liens such as second mortgages on a home. Unfortunately, only about a third of debtors who file a chapter 13 bankruptcy complete their repayment plans and received a discharge.
Authors of the “Race, Attorney, Influence, and Bankruptcy Chapter Choice” story stated that “while chapter 7 fees are lower, attorneys are often willing to take much of their fees in chapter 13 over time in the plan, so that debtors without savings may use chapter 13 in part to file more quickly.” A key motivating factor as to why some bankruptcy attorneys may prefer a chapter 13 is because attorney fees are more expensive in a Chapter 13 as opposed to a Chapter 7. These authors investigated the racial disparities that exist in modern bankruptcy and found that “chapter choice is heavily influenced by professional gatekeepers and is not a purely independent choice of the debtors who use the consumer bankruptcy system.” The raw data of this study found that there exists a “striking racial difference in use of the two chapters with 54.7 percent of the American-American households filing in chapter 13, compared to 28.2 percent of debtors of all other races.” Throughout their research, Bacher, Cohen and Lawless found the following percentage rates of chapter 13 use as opposed to chapter 7:
African American 54.7%
In addition to the staggering numbers mentioned above, the study” did not indicate that African-Americans were getting more lenient plans or better results in completing them. There was a weak trend for their chapter 13 plans to propose repaying more to their unsecured creditors than plans from debtors of other races (30.9 percent to 26.1 percent). Also, their cases were dismissed from chapter 13 at a higher rate than the cases of debtors of other races (36.2 percent to 25.5 percent, when followed up 10 to 14 months after their filings.)
These authors found no systematic evidence on whether actors (bankruptcy & federal judges, bankruptcy trustees, etc.) in the system other than debtors’ attorneys also play a role in producing racially disparate results. The study further indicated that “attorneys recommended chapter 13 to American-Americans who expressed a preference for chapter 7 at a rate that was trivially higher than that for whites who expressed a preference for chapter (45 vs. 38 percent).” Cohen expressed that “attorneys seemed to consider whites more competent if they took care of their financial interests and wanted a fresh start, while African-Americans were more likely to be expected to take the longer, generally more burdensome route of a chapter 13 plan to earn their competence by taking care of past mistakes.”
In her Racial Steering In Bankruptcy essay, Mechele Dickerson claims that “though black debtors are disproportionately placed in chapter, bankruptcy lawyers steer whites away from chapter 13.” Her research found that 57.4 % of black households were more than likely to be guided into a chapter 13 filing. It’s counter part (white filings) consisted of 29.2%. In a second study, Dickerson found that “lawyers concluded that whites who preferred to repay their debts in chapter 13 were confused, did not understand that it was not in their best interest to spend up to 5 years repaying old debts using future income, and needed to be saved from their unwise decision”.
Evidence from the story mentioned above suggests that the racial gap in use of chapter 13 appears to be substantial and attorney recommendations appear to be a significant factor of its production. The reality is that bankruptcy can be a very complex process, one difficult for the average person to understand therefore debtors’ attorneys play a strong role in chapter choice, which is often desired by clients.
The reality is that clients who are seeking legal advice about filing for bankruptcy have a right and should expect that their lawyer give them advice that protects their interests even if those interests may not be in the best interest of their creditors. We urge all who read this and are considering to file bankruptcy to seek the bankruptcy relief that is in your best interest. Until the system’s leaders investigate this racial disparity further and are able to address it, you should seek out honest, trustworthy, legal representation. The Law Offices of Ernesto Borges & BillBusters. Our firm focuses on providing the best option for your particular case without steering you into a bankruptcy that is not ideal for you. Call us at 312-853-0200 for more information or schedule your free debt analysis by clicking here.
“Race, Attorney, Influence, and Bankruptcy Chapter Choice” – printed in the Journal of Empirical Legal Studies
“Blacks Face Bias in Bankruptcy, Study Suggests” - nytimes.com
“Racial Disparities in Bankruptcy Filings” – theroot.com