Bankruptcy: African American Community Frequently Not Well-Served

African American Community Frequently Not Well-Served In Bankruptcy

If you take an opportunity to review a report by the Woodstock Institute, it provides an overview of bankruptcy with an eye to its impact on minority communities.  Personal bankruptcy has become increasingly common in the United States.In 2010, there were over 1.5 million consumer bankruptcy filings in the U.S. This was an increase of over nine percent from 2009, and the highest level on record for a year since bankruptcy reform occurred in 2005.

Bankruptcy:  The rising level of personal bankruptcy and its factors:

1.  The continued weak economy,2.  High levels of personal debt,3.  Rising medical costs4.  High foreclosure rates.

While filing bankruptcy often helps individuals and families who are deep in debt relieve some of that burden, the success of a bankruptcy filing is not guaranteed, and filing can have short- and long term implications for the economic opportunity of the individual filing and for communities or demographic groups with high concentrations of bankruptcy activity.

Personal Bankruptcy

Personal bankruptcy is a tool used by individuals with unmanageable debts that allows them to substantially reduce those debt burdens. The key causes of bankruptcy are numerous, but typically are attributed to economic distress tied to events such as job loss, health trouble, unexpected expenses, or excessive debt accumulation.The recent recession caused a dramatic spike in personal bankruptcy filings; from 2008 to 2010, bankruptcy filings increased nationwide by 43.1 percent.

Advantages to Bankruptcy

Bankruptcy can have positive effects on the lives of filers. It is intended to provide a mechanism through which individuals with overwhelming levels of personal debt are able to reduce that burden. By relieving this burden, bankruptcy, in theory, allows individuals to have a fresh start and redirect income previously tied up in debt repayment towards other essential costs such as utilities, rent, food, or even savings.While a bankruptcy is noted on a credit report for ten years, the immediate effect of a discharged bankruptcy can be a marked improvement in an individual’s credit score. Typically, this improvement is a result of an individual-in-bankruptcy’s credit score already being low due to a history of late repayment, so a reduction in the amount of debt owed can actually have a positive effect on credit score. While one of the goals of bankruptcy is to give individuals a fresh start, the type of bankruptcy a filer pursues has implications for the level of relief that that person can expect.Under bankruptcy law, individuals have the ability to file under different chapters of the bankruptcy code. These chapters dictate the way in which the bankruptcy will proceed and the type of relief an individual will receive. The chapters most commonly used in personal bankruptcy filings are Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy

In Chapter 7, an individual’s non-exempt assets are liquidated and most unsecured debts are discharged. In Chapter 13, an individual develops a repayment plan which restructures a filer’s debt for repayment over a three- to five-year period. After the payment plan is successfully completed, the remaining qualified debts are discharged. On its face, Chapter 7 would appear preferable for most filers because it is a relatively quick process that discharges most unsecured debt. However, bankruptcy filers may have reasons for choosing Chapter 13 over Chapter 7 and, in some cases, individuals may not qualify for a Chapter 7 bankruptcy. Changes to the bankruptcy code enacted in 2005 created provisions for income and means testing, which has made it more difficult for individuals to qualify for a Chapter 7 bankruptcy. If the debtors fail the means test, they often are put into Chapter 13 bankruptcy. Additionally, individuals who have successfully discharged debt through a Chapter 7 bankruptcy are restricted from filing another Chapter 7 bankruptcy for eight years.

Chapter 13 Bankruptcy

There are also circumstances where an individual who qualifies for a Chapter 7 bankruptcy may still choose Chapter 13, however, such as cases where an individual is trying to save his or her home from foreclosure. While mortgage debt secured by an individual’s primary residence cannot be restructured under either Chapters 7 or 13 bankruptcy, Chapter 13 allows for past due mortgage balances to be repaid as part of a larger debt restructuring repayment plan. Another reason some might choose Chapter 13 over Chapter 7 is tied to how legal fees are paid under each chapter.While overall legal fees typically are higher for a Chapter 13 bankruptcy, they can be paid in installments over the course of the three- to five-year debt restructuring plan. Because debts are discharged at the end of a Chapter 7 bankruptcy, bankruptcy attorneys require payment of Chapter 7 fees upfront. Therefore, individuals without the funds necessary to pay an attorney at the beginning of the bankruptcy process may be forced to choose Chapter 13. Individuals also may choose Chapter 13 over Chapter 7 bankruptcy out of a feeling of personal responsibility to repay creditors.

Research Suggests Disparity Along Racial Lines

Recent research has shown that substantial disparities in the usage of Chapter 7 versus Chapter 13 bankruptcy exist along racial lines. A recent analysis illustrated that, after controlling for factors likely to determine bankruptcy chapter choice such as home ownership, whether a pending foreclosure was the reason for filing bankruptcy, annual income, assets, debts, and other financial and socioeconomic factors, African Americans were more than twice as likely to file for Chapter 13 bankruptcy as similarly situated filers of other racial groups.While the research does not give conclusive reasons as to why these disparities exist, scholarly findings are consistent with the possibility that African American bankruptcy filers are being discriminatorily steered into higher-cost Chapter 13 bankruptcies. Filers might be steered into Chapter 13 bankruptcies for a number of reasons.As mentioned previously, attorney’s fees are higher for Chapter 13 compared to Chapter 7 bankruptcies. The median fee for a Chapter 7 bankruptcy is $1,000 while the median fee for a Chapter 13 bankruptcy is $2,500. In part, the higher Chapter 13 fees likely are due to the greater complexity of filing a Chapter 13 bankruptcy.However, research indicates that some law firms have developed specialization and efficiencies in dealing with Chapter 13 cases that make these cases more profitable, and such firms are more likely to refer clients to Chapter 13 even if this choice may not be most advantageous to the client. This same research found that a filer’s geographic proximity to a firm, and that firm’s particular chapter specialization, is predictive of a filer’s chapter choice. Steering clients into Chapter 13 filings may preclude filers from achieving the best outcomes from the bankruptcy process and fail to improve their economic situations.As described earlier, Chapter 13 filers must repay their debts through a three- to five-year repayment plan, whereas debts are immediately discharged under Chapter 7. If there are other, less costly options available to a filer, participation in a Chapter 13 repayment plan may divert critical income that could otherwise be used to stabilize or improve the filer’s economic situation. In addition, a high percentage of individuals in a Chapter 13 payment plan fail to complete the plans, meaning they achieve no long-term debt relief.Research has raised concerns about possible racial bias in the outcomes of Chapter 13 bankruptcy cases. African Americans petitioning for Chapter 13 bankruptcy are 21 percent more likely than white debtors to have their case dismissed by a judge.While bankruptcy is a clear indicator of individual economic distress, patterns of bankruptcy filings can also reveal the economic strains and vulnerabilities facing demographic groups or communities. Research has shown that women are much more likely to file bankruptcy than men, indicating significant financial challenges facing female-headed households, particularly single mothers.Additionally, a high geographic concentration of individuals in bankruptcy is an indicator of a community with heavy debt burdens. Beyond the financial distress illustrated by these burdens, these geographic patterns may illustrate broader vulnerability to financial scams and predatory financial products and more significant challenges to achieving community-level economic stability.

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