How to Address Apparent Racial Disparity in the Consumer Bankruptcy System

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.

Comments

[Bankruptcy Judge]

Perhaps Prof. Braucher or one of her colleagues would care to identify just which provisions of the Bankruptcy Code and Rules permit me to "address[ ] race disparity"?

I administer the cases assigned to me in accordance with bankruptcy policy as expressed in the Code. Nothing in the Code that I can find speaks to race. So all I'm able to do is treat people in a race-neutral fashion once they file bankruptcy cases. Choosing the kind of case to file in the first instance is their decision and the decision of their counsel, not mine. Nor is it for me to decide on my own that chapter 13 was a bad choice and a case ought to be converted to chapter 7. Section 1307(c) says "a party in interest or the United States Trustee" has to ask first.

Sorry, but there's just no way for me to address racial disparities in consumer filings. Don't look to the courts to fix this one.

[Jean Braucher]

You wouldn't police for racial bias but for its bad results in particular cases. Just to mention a few obvious tools, you can deny confirmation of outlier chapter 13 cases with no viability (for clients of any race), making use of Section 1325(a)(6)(requiring that the debtor will be able to make the payments) and also use the power to disapprove attorneys' fees if not reasonable, under Section 329 and Rule 2016(b), which even give you power to order return of fees to the client. You could also encourage your chapter 13 trustee to bring outlier cases to your attention.

But a first step would be to bring up the issue of unjustified race disparity in professional recommendations during a regular bench-bar-trustee meeting in your area. By raising a concern about possible racial bias in chapter choice, you would get lawyers' attention and reduce dramatically the need to use the tools mentioned above. Good lawyers practicing before you will want to look out for their clients in a race-neutral way and will welcome an opportunity for reflection and discussion. Bankruptcy judges can have a lot of good influence with persuasive power. You can prompt a professional discussion of when chapter 13 makes sense under the law, when it is marginal,and when it is just plain outrageous and exploitative.

With a few lawyers, you might have to step things up and stop their ill service of clients. Good lawyers will be glad to see that there are some standards.

[Debitor]

Historically poor socioeconomic classes file more bankruptcies, and when they don't have the required fee upfront they often get pushed into a chap 13 model to pay as they go which results in a higher fee. Also, 'white' people have an extreme, unjustified and irrational bias against filing bankruptcy and will go to the ends of the earth to avoid filing altogether. We called it the 'B' word around the office. The middle class 'white' guy refuses to admit he needs a bankruptcy and never even makes it into my office, but the middle to lower class minority most definitely wants to file and often they want to go chap 13 to keep the house or car, or figure making a small payment every month is a better way to go than pay 1500$ upfront plus filing fees. I don't think it is racist or based upon any disparity, it is completely cultural. Remove the white persons irrational biases against bankruptcy and you would most assuredly see far more white people filing chapter 13s.

[Bankruptcy Judge]

All of the statutory tools Prof. Braucher suggests be used to avoid "bad results in particular cases" are tools I already use. And they're race-neutral (as Prof. Braucher rightly notes). What's more, the chapter 13 trustees in my district are already vigilant about bringing outlier cases to my attention and the attention of my colleagues and seeking dismissal -- in at least one instance, arguably too vigilant. So in my district, the bankruptcy system is doing its job when it comes to doomed cases.

As for influencing lawyers through bench-bar meetings, for a host of reasons I don't believe it's reasonable to expect judges to exhort lawyers publicly not to bring pointless chapter 13 cases for African-American clients. First, consumer debtors lawyers for the most part strike me as folks who care deeply about their clients and are doing the best they can. Sure, there are some predators out there. But it's wrong to tar the entire consumer debtor bar with that brush. Second, as any judge will tell you, the kinds of lawyers who show up at seminars and bar association meetings are generally the cream of the crop. They're the ones who least need to hear exhortations to do better. Third, you can't usually stop predators from engaging in predation by appealing to "the better angels of their nature" -- because they wouldn't know an angel if they saw one. Fourth, in my experience judicial accusations that the bar is not up to snuff produce only resentment of the court, not improved behavior. I can just imagine how an accusation of racism would go over.

So I adhere to my original conclusion, I'm afraid. The courts are not the answer to the problem.

[Jean Braucher]

I certainly agree that most of the professionals of all kinds in the bankruptcy system are well intentioned, and I don’t recommend lectures on “racism,” which carries the meaning of deliberate race bias that persons consciously embrace and endorse. Most of the bias in the bankruptcy system is likely more subtle, some of it unconscious. Psychologists have a concept called “implicit bias,” which can be revealed by tests and which seems to be widespread across races and nationalities (part of how our brains work). There is an interesting Harvard web site on this concept, explaining it and providing some tests people can take to learn more about their own biases, of which they are often unaware, while also contributing to research. https://implicit.harvard.edu/implicit/demo/background/index.jsp There seems to be evidence that becoming aware of one’s own biases is a first step to compensating for them.

As for the comment by an attorney about culture, that may be a factor (and should be studied rigorously), but of course client choices are not purely their own. Bankruptcy is too complicated, making it very hard for non-experts to understand the ramifications of the available choices, which is why attorney recommendations matter. Respondents in the vignette study recommended chapter 13 disproportionately to African Americans even when they expressed a preference for chapter 7 in a hypothetical case designed to be borderline.

I hope judges, trustees, and attorneys won’t give up too quickly on trying to find ways to reduce race disparity in bankruptcy, which affects real people and their lives. Once obvious outlier practices are shut down, in some locales there may still be a lot of unjustified racial disparity left that is harder to address, but that doesn’t mean it is impossible to do so. Everyone working in this system has something to contribute.

[Dan Dufresne]

" Respondents in the vignette study recommended chapter 13 disproportionately to African Americans even when they expressed a preference for chapter 7 in a hypothetical case designed to be borderline."

I think this statement may be somewhat misleading since the data presented in Fig. 1 on p. 24 indicates that attorneys would recommend 13 at the same rate across categories in the absence of stated client preference. I think this is a significant "loose end" in this study, since the data seem to show no racial bias in recommendations where clients express no preference.

[AMC]

Let's say we had a group - we'll call them real estate agents - who place a higher value on luxury motor vehicles than non-real estate agent groups.

Unlike many financial problems, Chapter 13 actually does a good job for people who are upside down on a luxury vehicle (if the loan was more than 910 days old) and at the very least, the interest rate could be reduced to the Till rate, dramatically lowering the cost of keeping the vehicle.

On the Means Test, the luxury vehicle payment may be more than the standard vehicle allowance, essentially requiring unsecured creditors to help pay for the high end vehicle.

If you were to do an academic study on real estate agents in Chapter 13, and you controlled for housing, total assets, and the like - and you didn't look specifically at the real estate agents' motor vehicle loans as a possible motivating factor for choosing Chapter 13, the conclusion might be reached that bankruptcy attorneys are biased against real estate agents.

When, perhaps, Chapter 13 relief is a more useful tool for reaching the goal desired by real estate agents - keeping the expensive car. It is a less useful tool for other debtor problems. For example, those who are trying to get relief on their residential real estate, because that obligation is a non-modifiable debt.

If the bankruptcy laws are biased in favor of providing relief that real estate agents desire, is it real estate agent-ism for them to be a disproportionate segment of the Chapter 13 filers?

[AMC]

Another example, this one based on a racial stereotype that is, unfortunately, all too commonly true.

While many segments of the population have experienced a shift from "we must save the house!" to "how do we get out from under this under water house?" - one segment of the population has not followed that trend.

Broadly, it is single women with children under 18. From personal observation, the importance of keeping a house for single black women with children is even higher.

These women can be mothers, grandmothers - I have even seen great grand mothers. What they share is, they are the last refuge of the children, and they believe that they need to be the rock of stability for those children. And that involves staying in the home.

Chapter 7 doesn't save houses. Chapter 13 does a poor job - but it can help. A large segment of low income single mothers, and particularly black single mothers, will fight to the bitter end to save a house that any rational purely economic calculus would say: walk away.

Just a probably biased observation from experience.

[Raymond Bell]

I could not agree more with Hank Hildebrand. Bankruptcy law remains complex and when there is opportunity to fix parts, we end up with an overhaul to create more confusion.What ever has happened in a process supposedly giving "to the honest but unfortunate debtor....a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt"(Local Loan Co. v Hunt, 292 U.S.234,244-1934).Do we really want to invoke race into any reason or cause of filing different chapters in bankruptcy? Does it allow more study of data relative to fresh start and equality of distribution to creditors? I think not. Do we want to lead to assumptions of quantification which leads to the fallacy of measuring what isn't measurable? I do not think the preservation of the integrity of the bankruptcy is or should be race related or even studied. Consumers are and will continue to file bankruptcy because of income, not because of race. Fix what needs to be fixed is more important right now.

[Russ]

I'm sure there is a reason that doesn't show itself in the overall statistic as to the disparity. The poster, Debitor, above may have pointed out why.

We see this with mortgage lending where the statistics seem to show some form of discrimination of minorities when in fact there is no discrimination. The stats get skewed by nuances in how people shop for mortgages and other qualifications that rarely ever are captured in the data on loan applications (or the folks doing the study don't really know what to look for in the data...)

[Ed]

Much gets made, from recent studies about bankruptcy chapter choice to Judge Johnson's crusade against nearly all Chapter 13 cases being feasible in the Riverside Division in Central California, of how few Chapter 13 cases "succeed." This success rate largely relies on on the estimate that only one-third of Debtors complete a Chapter 13 plan and receive a discharge.

Lip service may get paid to the fact that "[e]ven when no discharge is obtained, a chapter 13 can buy more time to stave off foreclosure long enough to relocate." Other reasons for filing Chapter 13 may be also be admitted, but still the touchstone for determining if a bankruptcy is successful is whether the Debtor gets a discharge.

Since the vast majority of Debtors who file Chapter 7 do get a discharge, Chapter 7 is consequently viewed, at least in academic studies, as a more effective remedy for Debtors in financial distress.

But what if this focus on the discharge was flipped and instead the other reasons for Chapter 13 were considered as the primary criteria for evaluating the success of the different Chapters? For example, the discharge is of far less value for many Debtors than keeping their home, even for just a few more months or years.

I've looked through the SSRN website (http://www.ssrn.com/) and there is a relative dearth of studies concerning post-bankruptcy outcomes.

One of the few is "The Failure of Bankruptcy's Fresh Start" by Katherine Porter and Deborah Thorne from 2006. (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=894453)
It "found that just one year after bankruptcy, one in four [Chapter 7] debtors was struggling to pay routine bills, and one in three [Chapter 7] debtors reported an overall financial situation similar to, or worse than, when they filed bankruptcy." If 25%-33% of Chapter 7 Debtors are not better off and still struggling financially after receiving their discharges, the indictment of Chapter 13 based on its dismissal rates would seem to overly harsh, with the more even-handed conclusion being that neither chapter of bankruptcy is a perfect solution to financial distress.

The article "Household Borrowing After Personal Bankruptcy" by Song Han and Geng Li at the Federal Reserve (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1325660) looks at borrowing by Debtors after bankruptcy, but did not separate the experiences of Chapter 13 and Chapter 7 Debtors.

I was not able to find any studies that examined how often Chapter 7 debtors later lost cars to repossession or homes to foreclosure when they had indicated on their Statements of Intentiona desire retain or reaffirm the property. This would seem to be a useful means of gauging whether Chapter 7 Debtors were able to meet their stated and often primary goals in filing bankruptcy, viz. retention of assets.