A study has found that black debtors are twice as likely as white debtors to wind up in Chapter 13 Bankruptcy. This disparity persisted even when adjusted for income, homeownership, assets, and education. Chapter 7 typically allows debtors to erase most debts in a matter of months. Chapter 13 has a lower success rate and is more expensive than Chapter 7. Moreover, it requires debtors to dedicate their disposable income to pay back their debts. But how does this connect to bias?
The study consisted of two parts, the first used data from actual cases. 2,400 households nationwide who filed for bankruptcy in 2007 were surveyed. The second part involved sending lawyers fictitious couples where one appeared to be black and the other white. The lawyers were found to be more likely to recommend Chapter 13 to the black couple. This is even though their financial circumstances were identical. Other more limited studies have shown the higher incidence of Chapter 13 among blacks. Another study taken in mostly black communities showed nearly half the cases from 2006 to 2010 were filed under Chapter 13; compared with 32.8 percent of all cases filed in that county.
There doesn’t appear to be any evidence of discrimination in the bankruptcy process. The issue arises simply out of people’s bias towards certain groups. The bankruptcy law went through changes in 2005 to force more debtors to file under Chapter 13. However, this has not been the effect. The rate of Chapter 13 filings has remained relatively steady, at about 30 percent. Chapter 13 is not always an inferior choice. Many borrowers go that route because they may be able to save their homes from foreclosure. Even this does not explain the difference. Among blacks who did not own their homes, the rate of filing for Chapter 13 was still twice as high as the rate for other races.
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