New Study: Black Americans Have Higher Rate of Bankruptcy Dismissals. Lack of Debt Relief Contributes to the Widening Wealth Gap.

African-Americans are as much as 28 percent more likely to be dismissed from bankruptcy proceedings than non-Black bankruptcy filers, contributing to the widening wealth gap existing in the U.S., experts are reporting.

A bankruptcy dismissal closes your bankruptcy case, which means loss of protection of the automatic stay (the order that prohibits creditors from collecting debts). The bankruptcy petitioner continues to be liable for his debts.

Photo by Ketut Subiyanto from Pexels

A recent study released by the University of Pennsylvania’s Wharton School of Business reveals bias in bankruptcy dismissal rates. This study, along with a 2012 report, found that Black Americans were more likely to be advised to enter Chapter 13 versus Chapter 7 bankruptcy proceedings, revealing implicit bias existing in bankruptcy advice and proceedings. 

Led by Wharton finance professor Sasha Indarte, researchers found that Black bankruptcy filers were more likely to have Chapter 7 and Chapter 13 bankruptcy cases dismissed by the court. 

A bankruptcy dismissal occurs for a variety of reasons. If a judge believes there has been intentional misconduct on the part of a filer or if forms have not been submitted correctly to the court. But one of the most common reasons: failure to repay debts filed under Chapter 13. 

“When a case is dismissed, this means someone goes through all the hassle of trying to file for bankruptcy, but they don’t actually get the debt relief by the end of the process,” Indarte said during an interview with Wharton Business Daily on SiriusXM. “When we see that Black filers are much more likely to get their cases dismissed, that means they’re getting access to debt relief at a much lower rate.”

The study found that Chapter 7 cases for Black filers were 4 percent more likely to be dismissed than non-Black filers. The average dismissal rate for bankruptcy is 2 percent. Chapter 13 has a dismissal rate of 50 percent. Yet Black filers consistently face an 80 percent chance of having their bankruptcy dismissed. In addition, Black filers using Chapter 13 were 28 percent more likely to be dismissed than other filers. 

What Is Personal Bankruptcy? 

Personal bankruptcy is a legal process allowing a person who cannot repay their debts financial relief. Considered a significant source of debt relief, bankruptcy allows filers to organize and then manage their debts. Bankruptcy can be filed in two ways — Chapter 7 and Chapter 13 of the Bankruptcy Code. With the exception of medical bills, student loans, child support, tax repayments as a result of fraud, court fines, and fraudulent activity, any debt can be included in a bankruptcy. 

A Chapter 7 bankruptcy liquidates a person’s assets to Bankruptcy court. Then, the court reduces the assets to cash and pays off the creditors. A person using Chapter 7 will be debt-free with the exception of debts that cannot be included in bankruptcy proceedings.

With Chapter 13, debts are not completely erased. Instead, a repayment plan is created allowing the person to repay credits through the division of assets. With Chapter 13, filers are able to keep their larger assets such as a home or a car. For the next three to five years, they will make court-supervised repayments. At the end of their term, they will be debt-free. However, a 2017 study conducted by the University of Minnesota showed that Black filers were at least 50 percent less likely to eliminate their debts permanently when compared to other filers.

Bankruptcy Is Not An Easy Fix 

Yet bankruptcy does come at a cost. Filing bankruptcy can remain on a person’s credit report for up to 10 years — resulting in potentially higher interest rates and the inability to qualify for a mortgage. 

For filers of Chapter 13 who do not complete their repayment plan, there is the ultimate consequence of being stuck with debt and a loss of assets. 

For Black American filers, the prospect of having Chapter 13 dismissed as a result of non-repayment is high, many say due to pandemic unemployment, lack of income and other extenuating circumstances. Data collected by Upsolve found that 49 percent of Black Americans filing for bankruptcy cited COVID-19 as one of the top reasons. 

“We can’t say if this is, for example, racial animus versus a more subtle form of implicit bias,” says Indarte. “But what this is suggesting is that if you take a person and the only thing that you change about them is their race, on average they would see a different outcome in the bankruptcy process.”

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