Racial Bias in Personal Bankruptcy Tees Up Dispute Over Cause

A recent study of racial disparities in personal bankruptcy results indicates that implicit bias hinders minorities’ efforts to rid themselves of debt, but trustees who oversee those cases say the process is as fair as possible.

The race or ethnicity of bankruptcy trustees and debtors who file under Chapter 13 of the US Bankruptcy Code isn’t disclosed in court papers. However, an academic study found, via other types of public documents, that people of color who file Chapter 13 bankruptcy are less successful than their White counterparts in turning their financial situation around.

Minority debtors are 12.7 percentage points more likely to be dismissed from bankruptcy without debt relief. That figure rises 2.3 percentage points if their Chapter 13 trustee is White, according to the study.

When controlling for factors such as income, the study found the disparity remained, although the dismissal gap between minorities and White debtors shrunk to 3.6 percentage points. The study also said 32% of Black debtors are dismissed without debt relief overall compared to 12% for White filers.

Chapter 13 trustees, who are randomly assigned by judges, wield considerable power over an individual’s bankruptcy. They can urge a judge to toss a case if they think a debt repayment plan is unlikely to succeed.

A Chapter 13 debtor must complete a three-to-five-year repayment plan before they can be discharged from bankruptcy. While many end up dismissed without debt relief, Chapter 7 debtors tend to be discharged within a few months with qualified debts—such as credit cards and and medical bills—wiped out.

Racial disparities exist in both types of bankruptcy, but the study found it’s more prevalent in Chapter 13—where the authors say implicit bias can play a larger role.

“It is just a simple, objective fact in the data that minority filers have higher dismissal rates when paired with White trustees than minority trustees,” said Christopher Palmer, a finance professor at MIT Sloan School of Management and co-author of the study.

Handling Identification

Trustees and bankruptcy lawyers argue that dismissed cases are usually the result of a debtor’s failure to meet requirements and deadlines, not implicit racial reasons.

Melissa J. Davey, an Atlanta-based trustee whose practice handles thousands of cases, said she typically files objections in every case that crosses her desk.

“Most of the time I don’t touch them in terms of personally interacting with the debtor,” Davey, who is also the vice president of the National Association of Chapter 13 Trustees, said.

The study’s authors said trustees use a photocopy of government identification to verify a debtor’s identity. But only one staff member, out of dozens working a case, tends to see the photocopied ID, which is purged afterward to prevent a security risk, Davey said.

Trustees argued that racial bias is unlikely because most interactions typically occur with debtors’ attorneys, rather than the debtors themselves.

The authors said preferential decisions based on factors such as the filer’s name, which may imply race, could lead to dismissals for people of color.

Davey noted that while trustees make dismissal recommendations, it’s the judges who make the final decision.

Past research showed Black filers were steered into Chapter 13—with tougher discharges and more repayment responsibilities—more often than people of other races were.

Trustees and the National Association of Consumer Bankruptcy Attorneys interviewed for this article said they’re working to diversify staff across the country to reflect local demographics.

‘Not Cookie Cutters’

The study examined more than 26 million Chapter 13 and Chapter 7 cases filed from 2008-22. The authors compiled the data by matching filers’ names and addresses to publicly available information such as voter registration, which includes race and ethnicity.

Chapter 13 trustees interviewed were concerned with how race was imputed in the study. While a filer’s race was collected through public documents, trustees were identified through public images and a deep learning algorithm, the study said.

Lending practices, credit scoring, and historical discrimination often lead to bankruptcy, experts said.

Credit cards “create a vicious cycle of debt that is hard to overcome,” said personal bankruptcy attorney Linda M. Tirelli of Tirelli Law Group LLC.

But Chapter 13 cases “are like snowflakes, not cookie cutters,” said Tirelli, who practices in New York and describes her clientele as diverse. “Each one is different so the reason for dismissing is going to vary greatly.”

The unemployment rate in February was 4.1%, yet Black people were above the national average at 6% and White individuals were below at 3.8%.

Black people are more disadvantaged by the wealth gap and in home ownership, which is worsened by lack of debt relief, the authors said.

Income Problems

Chapter 7 is more attractive to some because it liquidates certain assets to eliminate debts, even though it requires upfront fees.

Reducing bankruptcy disparities could be accomplished if Congress created equal access to Chapter 7 and Chapter 13, said Ishaq Kundawala, a bankruptcy professor at Mercer University School of Law.

When Chapter 7 is “inaccessible” to Black people, “they flow into” Chapter 13, he added.

More people would benefit from legislation allowing debtors to pay Chapter 7 fees over time, Kundawala wrote in a 2022 law review article.

Systemic racial bias tends to prevent minority debtors from being able to “afford their lives,” said Lon Jenkins, a Utah Chapter 13 trustee and the president of the NACTT. Some people file because of foreclosures, wage garnishments, or car repossessions, he noted.

“Chapter 13 bankruptcy is a solution for debt problems, but it’s not a solution for income problems,” said Ed Boltz, a Durham, N.C.-based attorney and co-legislative committee chair of the NACBA.

With fewer safety nets, Black filers tend to have a harder time avoiding dismissal, experts said.

“Systemic racial bias exists in our society and bleeds into everything,” Jenkins said. “So of course it’s going to bleed into the bankruptcy system as well, but not in an explicit way.”