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Race and Choice of Chapter 7 Verses Chapter 13 Bankruptcy

An important new study, entitled “Race, Attorney Influence, and Bankruptcy Chapter Choice,” undertaken by University of Illinois Law Profession Bob Lawless, along with colleagues Jean Braucher, of University of Arizona and Dov Cohen, also a professor at Illinois (in psychology and law), outlines some serious potential problems in the bankruptcy process, in the United States.

The study, by the Consumer Bankruptcy Project, indicates that black bankruptcy petition filers use chapter 13 at a higher rate than chapter 7. In fact, blacks are about two times a likely as whites to file Chapter 13, with the black Chapter 13 rate at 54.7% and the white rate at 28.6%. Asians were found to file Chapter 13 at 24.4%, and Hispanics at 21.7%. Our has a mission of keeping clients informed of news such as this study.
Let’s review the difference between the two types of bankruptcy. Chapter 7 bankruptcies are generally cheaper to file, allow folks to kept most of their assets and discharge most of their debt. Homes are protected under the Massachusetts Homestead exemption, pensions are protected, but other assets are limited. In fact, under Chapter 7, most debts are discharged within 90 days, and petitioners get a “fresh start.” Chapter 13 bankruptcies, however, require that petitioners repay their debts, based on income, over a period of time up to 5 years. Thus, Chapter 13 offers less relief and costs more. Further, Chapter 13 cases fail at a significantly higher rate: the plans are difficult to comply with month after month, year after year. Circumstances change. If so, why are a disproportionate number of black filers using Chapter 13?
The professors undertook two studies. They first looked at actual statistics from the federal bankruptcy filings each year. After considerable analysis, they determined that “African Americans are much more likely to file chapter 13, as compared to debtors of other races,” according to their abstract.
Second, and quite troubling, the professors sent out surveys to bankruptcy attorneys, similar to, but not including, this Boston bankruptcy lawyer. The survey included questions about a hypothetical African American couple, Reggie and Latisha, of the African Methodist Church and a white couple Todd and Allison, of the United Methodist Church. Unfortunately, the surveyed attorneys recommended the “fresh start” Chapter 7 bankruptcy disproportionally to the apparent white couple, and the more financially burdensome and more expensive Chapter 13 bankruptcy to the apparent black couple. The professors make a significant point. Are lawyers, judges, trustees, indeed the whole system, biased? If so, how do we fix it? It’s a complex system, often tossed about by politicians, including the ones who were sucked into passing the Bankruptcy Act of 2005.
The study will be published in the Journal of Empirical Legal Studies sometime in 2012, so we don’t have all of their statistics yet. But they inform that the statistics are the same across the country, and includes the south, where Chapter 13 rates are higher in general.
Now, there are going to be academics, politicians and community leaders who object to many aspects of the study. Hopefully, they will prove these distinguished academics wrong. But, in the mean time, it may be instructive to look at some of the facts after we get the full paper. Some details we do have, however: blacks file Chapter 13 at a higher rate than homeowners (54.6% verses 47.1%). Given that most folks have all of their wealth in a home, and homes are protected by homesteads, this is a troubling statistic they have uncovered.