The Bankruptcy Code and Black Business Owners: An Overview on the Racial Disparities that Exist in Bankruptcy Proceedings

"sisyphus paradox." by percipio symphony is licensed under CC BY 2.0

 In a recent podcast for Bloomberg Law, University of Texas at Austin School law professor Mechele Dickerson discussed how the Bankruptcy Code favors white debtors over Black or Latino ones in various ways.[i] 

Interviewer: “Is there a racist element in the U.S. Bankruptcy Code?”

Professor Dickerson: “Intentional? No. But if you look at the way the Code is structured for human beings that file for bankruptcy, there are clear biases and it so happens that these biases favor a certain profile which I have called in the past an ideal debtor…” [ii] 

This is a reality that has not gotten much attention in legal and business communities. Although there have been dozens of studies that have found Black debtors file for bankruptcy disproportionately more than other racial groups (yet get less permanent relief) there has been no definitive answer presented as to why.[iii] 

This is a problem that the COVID-19 pandemic has only made worse. The pandemic has disproportionally impacted communities of color, Black communities especially.[iv] Thus, it has been Black people who have been most impacted by job losses and being forced to close their businesses, businesses that did not receive relief from the Paycheck Protection Program even though they were eligible. [v] With dwindling income, Black Americans may start finding themselves without the ability to pay their debts in alarming numbers.[vi]

 When debtors realize they can’t service their debt and want to file for bankruptcy, they have two options: file for Chapter 7 or 13 bankruptcy. In short and general terms, during Chapter 7 proceedings most of a debtor’s property is sold to pay off their debts, however their debts are discharged (meaning, they get erased) at the conclusion of the process. Chapter 7 gives the debtor a “fresh start.” In a Chapter 13 bankruptcy, the debtor’s property is not sold off, but rather the debtor agrees to a repayment plan over a period of 3-5 years. If the debtor successfully completes the court-mandated plan, the rest of the debtor’s debt is discharged, and they’re allowed to keep their property. 

 For most low income people who don’t own a lot of property, Chapter 7 provides the greatest relief.[vii] Unfortunately, in 2005 Congress passed a law[viii] with the intention of forcing more people into Chapter 13 (instead of 7) so as to ensure more people paid down their debts.[ix]  Chapter 13 repayment plans are hard on the debtor, two-thirds end in failure leaving the debtor far worse off than when proceedings began, with their property repossessed and their debts not erased.[x]

 At the same time, Black people are about two times as likely as white people to file Chapter 13, 54.7% vs 28.6% respectfully.[xi] Asians were found to file Chapter 13 at 24.4%, and Hispanics at 21.7%.[xii] Why are so many Black debtors choosing the option that provides less relief? That’s a central question for which there are several competing answers.

A study done in Memphis, a city that has more failed Chapter 13 proceedings than 22 states combined,[xiii]  attributes the problem to the local bar.[xiv] Local bankruptcy attorneys push their clients into Chapter 13 because of its fee structures. In Memphis, it costs around $1,000 to hire an attorney to file a Chapter 7, but most attorneys will file a Chapter 13 for no money down.[xv] The fees for Chapter 13 filings are higher — upwards of $3,000 — but the payments are made in installments. This is the only option many people can afford, “debt relief on credit.”[xvi] This dynamic is seen throughout the country.[xvii]

 Additionally, to benefit from bankruptcy laws, the “ideal debtor” should be a married, employed homeowner who has a large retirement account, has high, but reasonable, living expenses, only provides financial support to legal dependents (not to their parents, for example), and has little (or no) student loan, alimony, or child support debt.[xviii] White debtors are much more likely to fit this profile than Black debtors. Regardless of the Code’s authors intent, the Code has racial biases written into it.[xix] Biases in the Code are exacerbated by the fact that lawyers’ racial biases toward Black clients lead them to “steer” Black debtors towards Chapter 13.[xx] This phenomenon is part of a larger history of Black people systemically being offered suboptimal solutions when they participate in routine consumer financial transactions.[xxi]

 To be sure, not everyone thinks there are racist dynamics at work in this area of the law. Rather, some scholars, particularly law and economics ones, view the disparate impact for Black debtors as one of poor people in general not seeing Chapter 7 as a viable option.[xxii] What this race-neutral approach fails to take into account is that even when income of the debtor is controlled there are still racial disparities in outcomes for debtors.[xxiii] It also fails to acknowledge that the very systems that undermine working class people’s ability to navigate bankruptcy are often rooted in a racist history.  

We need more research that doesn’t shy away from race conscious analysis of the Bankruptcy Code.[xxiv] This scholarship will hopefully pave the way for more client-centered lawyering for debtors. At the Community Enterprise Clinic, we are serious in getting to know our clients and understanding their goals. This includes being socially informed about the communities our clients operate in. The same approach is needed in the Bankruptcy bar. Once that becomes the norm, there will be a better chance in reforming the laws that have made filing Chapter 7 so much harder. Bankruptcy exists to provide overburdened debtors needed relief. As it currently stands, the Bankruptcy Code is set up where too many Black debtors find themselves in a Sisyphean cycle. With an ongoing pandemic, the Bankruptcy Code and bar requires much needed reform.

 

 By Miguel Suarez Median

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[i] Is the U.S. Bankruptcy Code Racist? Bloomberg Law Podcast (Sept 20, 2020) (https://www.bloomberg.com/news/audio/2020-09-12/is-the-u-s-bankruptcy-code-racist-podcast).

[ii] Id.

[iii] Leslie A. Pappas, Bankruptcy Racial Disparities Poised to Add to Pandemic Pain, Bloomberg Law (Sept 12 2020 6:30 AM), https://news.bloomberglaw.com/bankruptcy-law/bankruptcys-racial-disparities-poised-to-add-to-pandemics-pain.

[iv] Kim Parker, Juliana Menasce Horowitz and Anna Brown, About Half of Lower-Income Americans Report Household Job or Wage Loss Due to COVID-19, pew Research Center (Apr. 21 2020 6:30 AM), https://www.pewresearch.org/social-trends/2020/04/21/about-half-of-lower-income-americans-report-household-job-or-wage-loss-due-to-covid-19/ .

[v] The Paycheck Protection Program Continues to be Disadvantageous to Smaller Businesses, Especially Businesses Owned by People of Color and the Self-Employed, Center for Responsible Lending  (May 27 2020),  https://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/crl-cares-act2-smallbusiness-apr2020.pdf?mod=article_inline.

[vi] Pappas, supra note iii.

[vii] Id.

[viii] Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub.L. 109–8, Apr. 20, 2005, 119 Stat. 23 Short title, 11 USCA § 101.

[ix] Tara Siegel Bernard, Blacks Face Bias in Bankruptcy, Study Suggests, N.Y.  Times (Jan. 20, 2012),  https://www.nytimes.com/2012/01/21/business/blacks-face-bias-in-bankruptcy-study-suggests.html?_r=3&hpw.

[x] Id.

[xi]Race and Choice of Chapter 7 Verses Chapter 13 Bankruptcy, American Bankruptcy Institute,   https://www.abi.org/feed-item/race-and-choice-of-chapter-7-verses-chapter-13-bankruptcy

[xii] Id.

[xiii] Paul Kiel with Hannah Fresques, How the Bankruptcy System Is Failing Black Americans, ProPublica,  (Sept. 27, 2017),   https://features.propublica.org/bankruptcy-inequality/bankruptcy-failing-black-americans-debt-chapter-13/.

[xiv] Id.

[xv] Id.

[xvi] Id.

[xvii] Id.  

[xviii] A. Mechele Dickerson, Race Matters in Bankruptcy, 61 Wash. & Lee L. Rev. 1725, 1726 (2004).

[xix] Id. at 1727

[xx] See generally A. Mechele Dickerson, Racial Steering in Bankruptcy, 20 Am. Bankr. Inst. L. Rev. 623 (2012).

[xxi] Id. at 638-47.

[xxii] Edward R. Morrison et. al., Race and Bankruptcy: Explaining Racial Disparities in Consumer Bankruptcy, 63 J.L. & Econ. 269 (2020)

[xxiii]Jean Braucher et. al., Race, Attorney Influence, and Bankruptcy Chapter Choice, J. of Empirical Legal Stud. 393, 421 (2012).

[xxiv] See e.g., David A. Skeel Jr., Racial Dimensions of Credit and Bankruptcy, 61 Wash. & Lee L. Rev. 1695, (2004) (Where the author applies Critical Race Theory in his analysis of bankruptcy law).