How to Address Apparent Racial Disparity in the Consumer Bankruptcy ...

The article discussed in the N.Y. Times story today is heavily empirical. It is also deliberately light on the prescriptive. Bob Lawless, Dov Cohen and I did make two modest proposals: (1) that a question about race of the debtor should be included on the form for a bankruptcy petition to make it possible to confirm (or disprove) the finding that African Americans file in chapter 13 at a much higher rate than debtors of other races (about double in the data we have), and (2) that all actors in the bankruptcy system—judges, trustees, attorneys and clients—be educated about the apparent racial disparity and the possibility that subtle racial bias may be producing it. The Times certainly helped with the second one!

Beyond that, we leave it to others and to each of us individually to come up with policy responses. In my view, Henry Hildebrand, a longtime chapter 13 trustee in Tennessee, got the big picture exactly right; he is quoted in the Times story as saying we should “use this study as an indication that we should be attempting to fix what has become a complex, expensive, unproductive system.” He will probably reappraise his views if he finds out that I agree with him! Those of us who participate in or study the system know that its complexity is onerous.

Three key points: Racial disparity is part of a bigger problem with the bankruptcy system, which is that complexity leads to disparate results for the similarly situated as well as additional expense. Also, judges, trustees and the U.S. Department of Justice need to be part of addressing race disparity, and they need to have race data collected in court records to do so most effectively.

The bankruptcy system got dramatically more complex and thus expensive with the 2005 amendments. Race disparity is just one instance of rampant disparity for those in similar financial situations. Complexity, including the possibility that any given debtor is choosing chapter 13 for moral reasons, makes it possible to justify any chapter choice in most cases and tends to mask unfair disparity of various kinds, including by race.

Speaking just for myself, I think we need a single portal to the bankruptcy system for individual debtors. This would make it a lot easier to move toward more similarity of results for the similarly situated and to reduce the cost of administration through simplification. Debtors with higher incomes might be required to pay something out of surplus income to old creditors, and the current standing chapter 13 trustees could be redeployed as the trustees for all individual cases. More of the details of this position are spelled out in my 2006 article, A Fresh Start for Personal Bankruptcy Reform: The Need for Simplification and a Single Portal. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=912561 I have heard that the National Bankruptcy Conference is working on a single chapter approach to consumer bankruptcy, and I wish NBC success in this project, although the difficulty of the politics of attaining any positive change through legislation cannot be overstated.

The professionals in the bankruptcy system are on the whole a very conscientious, self-critical and public-spirited group, committed to equal justice, and I expect that judges, trustees, and attorneys will rally to take on the challenge of eliminating any unjustified racial disparities, even without a needed legislative overhaul to simplify the system. The consumer debtor attorneys who took the time to answer our survey based on a vignette have already helped greatly; they volunteered their time to improve the bankruptcy system, knowing that we were interested in the mechanisms of chapter choice.

In our article, we did not have any data to examine the role of bankruptcy judges and trustees in producing racial disparity in chapter choice, but that does not mean they are off the hook. Judges and trustees are important players in the system, and they can influence the recommendations of attorneys. They need to be part of the solution, and they will want to be. Furthermore, the U.S. Department of Justice, particularly its Executive Office for the U.S. Trustees, should be involved in addressing this issue. Monitoring by judges, trustees and DOJ would be made easier by having information about race in the paperwork of cases.

The U.S. court system should start collecting race information from debtors on their bankruptcy petitions. This is not an uncontroversial position, for privacy reasons. Race, like the Social Security numbers already collected on petitions, should be kept private. But race information needs to be available to trustees and judges in each case. For the public, the race information should be in aggregate form only, matched with other data points collected by the U.S. Court system. Having race information about the full census of cases would be the best way to confirm or disprove the finding of disproportionate use of chapter 13 by African Americans.

In discussions with bankruptcy lawyers and other professionals about the article, I’ve found that some say they knew about the race disparity already because they have seen it with their own eyes in meetings of creditors required in each case. These professionals told me they see a higher proportion of African American debtors in the chapter 13 meetings than in the chapter 7 meetings. This seems to be most evident in the South and other areas where the black population is large and thus the disparity is more apparent. The racial disparity appears to exist, however, across regions even where the minority population is very small. In a complex system, however, those who have witnessed racial disparity in chapter choice don’t know for sure if there is a good justification, for example the possibility that African Americans have more of a commitment than other debtors to repayment and for that reason choose chapter 13 more often. But because of the importance of attorneys in guiding a complex choice, an obvious factor to study is their influence through their chapter choice recommendations. In our vignette study we found that these recommendations accounted for two-thirds of the racial disparity seen in a study of real world cases (in which African Americans used chapter 13 at about twice the rate of debtors of other races).

Bob, Dov and I of course encourage examination of our methodology, which is why we chose to place the article in a peer-reviewed journal. Academics are probably going to do a better job of finding flaws than most practicing attorneys. We tried very hard to be rigorous in our methods and account for hypotheses for justified race disparity in use of chapter 13. The vignette used figures for income and expenses that are close to national medians of bankruptcy debtors. Also, in the real world study’s data, controlling for homeownership, income and many other factors did not explain the race disparity. We also looked at available data on results in chapter 13, and we found that African American debtors are not getting better results, so that does not explain why they are filing more in that chapter. African Americans actually propose slightly higher percentage payments to unsecured creditors than debtors of other races. African Americans also have higher dismissal rates for their chapter 13 cases.

We are not saying, as some seem to think, that chapter 13 is always financially worse than chapter 7 for any given debtor, white, African American or of another race. Even when no discharge is obtained, a chapter 13 can buy more time to stave off foreclosure long enough to relocate. Chapter 13 also can be preferable for other reasons that lawyers legitimately take into account, for example, to strip junior liens with no collateral value to support them, to pay nondischargeable, priority debts such as child support and taxes in the plan ahead of other unsecured debts, to make up arrearages on secured loans in attempts to save a home or car (although this feature may be overused, because saving the collateral may not be feasible), to reserve conversion to chapter 7 for a discharge there later if finances deteriorate further, and to pay attorneys’ fees over time, among others. But the ways in which chapter 13 can be better for particular debtors do not appear to explain the wide race disparity in its use since all these reasons apply across race and since several apply only to homeowners, a factor for which we controlled.