More than 1,400,000 people filed for bankruptcy in fiscal year 2011. According to a recent study, Blacks are about twice as likely as whites to have to deal with the more costly form of consumer bankruptcy. This is regardless of income, home ownership, assets and education.
The study of racial differences in bankruptcy filings, written by bankruptcy expert and law professor Robert M. Lawless and psychology professor Dov Cohen with the University of Illinois and University of Arizona law professor Jean Braucher, found evidence that suggested that lawyers disproportionately steered Blacks into complicated and costly bankruptcy, in part because of biases–conscious or unconscious.
Generally, most people file under Chapter 7 of the bankruptcy code. This allows debtors to erase most debts in eight months. It is also less expensive than Chapter 13, which requires filers to use their disposable income to pay back debts over a period of several years. Besides the expense of filing Chapter 13, there are other drawbacks. Chapter 13 plans are less successful than Chapter 7 plans. According to the findings, two of every three Chapter 13 plans are not completed and the filers’ remaining debts are not discharged.
According to the study, bankruptcy lawyers were more likely to steer Black debtors into a Chapter 13 than whites. Some opt for Chapter 13 because filers are able to save their homes for foreclosure. But even Blacks who did not own their homes were still twice as likely to file Chapter 13 as the rate for other races.
According to Scott Dillon, senior bankruptcy attorney at Tully Rinckey PLLC, this might also be due in part to the state of the U.S. economy.
“It is not surprising that the study shows more people are filing chapter 13 cases in this economy. With significant job loss, coupled with the sub-prime mortgage crisis (which resulted in too much credit being extended to borrowers without the normal certainty of being able to afford the loan) people’s homes are being foreclosed at historic levels. The only method through bankruptcy to save the home and cure the default is through Chapter 13,” he points out. “The African-American community might have been more exposed to the sub-prime loans, and as a result, may be more likely to file Chapter 13 in the defense of their home.”
Adds Bruce Weiner, Partner, Rosenberg, Musso & Weiner, LLP, “On the other hand, I am not surprised because I have been at conferences and read statistics from other districts, mostly in the South, where a high percentage of debtors file Chapter 13. Given the racial history in those districts, I am not surprised that Blacks end up in a Chapter 13.”
There are steps to take to avoid being steered to the wrong type of bankruptcy filing. “The absolute standard to determine whether you are eligible is the Means Test. This test compares your actual income and expenses to the average income and expenses of your state. If you pass the Means test, subject to a review of your assets, you may file Chapter 7. But it is important to remember that Chapter 7 will not fix any mortgage arrears, it will only discharge unsecured (credit card) debt or discharge the mortgage if the person is abandoning the home,” explains Dillon. “A person questioning why they are in Chapter 7 must require that their attorney clearly go through the Means Test, line by line, to understand why the Chapter 13 is being recommended as well as reviewing what assets are or are not protected in the bankruptcy pursuant to exemptions.”
Research the bankruptcy process before filing. “The best way to avoid this is for debtors to understand their rights and learn more about the bankruptcy process before filing,” says Weiner. Also, “remember, the attorney works for you and must comply with your instructions,” adds Dillon.
If you have filed or been steered to file Chapter 13 when Chapter 7 would better suit your needs, there is recourse. “If the case is already filed, a Chapter 13 debtor has an absolute right to convert the case to one under Chapter 7, unless they have already filed Chapter 7 within eight years of the new case,” explains Dillon. “If the attorney refuses to cooperate, complaints can be brought to the local U.S. Trustee’s office, which is the office that oversees all bankruptcy cases on behalf of the U.S. Government. A debtor may also bring any complaints about their representation to the judge of the case, who will likely move very swiftly to resolve any dispute or question.”
The study did not suggest obvious proof of discrimination in the bankruptcy process.