The Bankruptcy Code Is Stacked Against Black Families. Elizabeth Warren’s New Bill Would Change That
Bankruptcy offers a way out for families and businesses trapped in debt. In 2019, Forever 21, Barneys New York and Payless ShoeSource declared bankruptcy. that of Donald Trump companies have declared bankruptcy six times.
The Bankruptcy Abuse and Protection Act of 2005 made accessing bankruptcy much more expensive and time consuming for ordinary Americans. After passing the BAPCA, typical costs to declare bankruptcy fell from $ 663 to $ 986 for Chapter 7 bankruptcy, and from $ 1,847 to $ 2,515 for Chapter 13 bankruptcy.
But even before BAPCA, the bankruptcy code was stacked against black families. Under current law, there are two types of consumer bankruptcy. In a Chapter 7 bankruptcy, the filer has to give up some of their assets, but their debt is written off – no further payments need to be made. By comparison, in a Chapter 13 bankruptcy, families can keep their assets, but must agree to repay their debt under a modified payment plan. Since the types of assets held by most middle and working class families, including home equity, automobiles, basic personal effects, and some retirement accounts, are elusive under either form of bankruptcy, Chapter 7 is usually much more favorable. for families with limited means. BAPCA put more stringent criteria on who could declare Chapter 7 bankruptcy, limiting it to households with incomes at or below their state’s median, or to households with other qualifying expenses. While lawyers are always expected to look after the best interests of their clients, research shows that bankruptcy lawyers disproportionately steer black filers toward the more punitive Chapter 13 system, and disproportionately steer white filers toward the more lenient Chapter 7 system.
According to a 2012 study published in the Journal of Empirical Legal Studies, black families are more likely to file for Chapter 13 bankruptcy than those in Chapter 7, even after controlling their legal and financial situation. Eager to understand the underlying causes of this discrepancy, researchers at the University of Illinois and the University of Arizona conducted a study of 596 bankrupt lawyers in the United States. Lawyers were given a file on a fictitious couple and asked for their impressions, including whether they would recommend the couple for Chapter 7 or Chapter 13 bankruptcy. When the fictitious couple were called “Reggie and Latisha” and dated an African Methodist episcopal church, lawyers were 1.5 times more likely to suggest Chapter 13 bankruptcy than when the fictional couple were called “Todd and Allison” and attended a United Methodist church. The authors concluded that racist attitudes among bankruptcy lawyers played a role in the filing decision. At the time of the study, 89% of bankrupt lawyers were white.
On December 9, Senator Elizabeth Warren (D-MA) and Representative Jerrold Nadler (D-NY) presented legislation this would reduce the disparity between black and white filers, streamlining Chapter 7 and 13 bankruptcies into a single system accessible to all consumers. Under the Consumer Bankruptcy Reform Act of 2020, all low-income and low-income families who file for bankruptcy would automatically be considered for “discharge without payment.”
It may sound like a cruel joke, but in the current system, many people are content with can’t afford file for bankruptcy, due to the high cost of filing fees and attorney fees. Americans can file for bankruptcy without a lawyer, file on their own, or file with an online legal service like Solve, but the federal government “strongly” recommends that Americans retain a qualified lawyer, because of the “long-term financial and legal results.”
Because Chapter 7 bankruptcy wipes out filers’ debt, Chapter 7 attorney fees are usually due in advance: Judges discourage or forbid lawyers from offering Chapter 7 payment plans. This restriction ironically means people have to “save” money to file for bankruptcy – or ration food, medicine and other essential products. The Consumer Bankruptcy Reform Act would allow bankrupt filers to reimburse their attorney fees on a payment plan over time.
The bill would also address racial disparities in the bankruptcy system by making some fines and criminal court costs that can be discharged in bankruptcy. A number of sources found racial bias in arrests and prosecutions, with black Americans more likely than whites to be sentenced to prison, even if they commit the same crime.
The biggest American companies are certainly doing proper use of the bankruptcy system. It is time for every American to receive the same level of protection.