Bankruptcy and Racial Bias

Bankruptcy is often touted as a last resort for individuals who have unmanageable debt. And to be clear, many who file for bankruptcy find that the court wipes out a nice chunk of outstanding debt, improving the lifetime earnings of both the filer and of their children. That’s great news for Americans who find themselves trapped in a cycle of debt—although for nonwhite filers, there is often no real benefit according to one study.

Study Findings 

According to the National Bureau of Economic Research, people of color who file for Chapter 13 bankruptcy are about 13 percent more likely to have their cases dismissed with no debt relief whatsoever.  Additionally, the study concluded that the official’s race in bankruptcy cases is directly correlated with the success of the bankruptcy filing. When results were controlled to consider whether filers hired an attorney and for income levels, the disparity dropped almost 10 points. Even at 3.5 percent racial disparity, though, there are a large number of nonwhite individuals who are not getting the relief they need after undergoing severe financial hardships. The study’s authors conclude that implicit bias may truly be harming bankruptcy filers from minority groups.

More Data 

Wharton Business notes that Black people are often steered toward Chapter 13, which tends to be more costly than Chapter 7. Blacks who do file Chapter 7 are more likely to have their cases dismissed than others to the tune of 4 percent, which is twice the average dismissal rate. They report that Black Chapter 13 filers were a whopping 28 percent more likely to have cases dismissed. And an MIT report puts the numbers of dismissed cases at nearly 13 percent for Chapter 13 and 2.3 percent for Chapter 7.

How Accurate are the Findings? 

Anecdotally, one person who administers bankruptcy proceedings for a living says the conclusions of this study are bunk. In his proceedings, the debtor’s race is not a factor and is often not even known by processors.  And since trustees in the process earn a percentage of bankruptcy payments, they’d be working against their own interests by recommending a dismissal. Finally, the individuals interacting with the debtor as the case starts up are usually different from the staff who deal with payment monitoring. All in all, there is simply no incentive to dismiss a case, minority filer or not.

Fighting for You 

The dedicated Miami bankruptcy attorneys at The Law Office of Julia Kefalinos always fight for the best possible outcomes for you, regardless of race or other factors. To discuss your situation, schedule a confidential consultation in our Miami office today.

Source:

marketplace.org/story/2025/04/02/study-minority-borrowers-debt-forgiven-bankruptcy-proceedings