Bankruptcy Rates by Race

How the choice of a bankruptcy type is hurting Black Americans

Public records on bankruptcy filings don't specify a debtor's race. So definitively splitting out bankruptcy rates by racial group is generally not possible. Still, data researchers have managed other ways of comparing bankruptcy filings by race, with ProPublica publishing a major investigative study on the topic in 2017. Its data revealed significant disparities between the races in the types of bankruptcy each filed and their success rates in emerging from bankruptcy.

Key Takeaways

  • Detailed data on bankruptcy rates by race is unavailable because court filings do not indicate the debtor's race.
  • Data from majority-Black ZIP codes versus majority-White ZIP codes indicates that Black debtors are much more likely than White debtors to file for Chapter 13 bankruptcy.
  • The path to success is much more difficult via Chapter 13 than through Chapter 7.
  • Chapter 13 filers in Black ZIP codes show a much higher failure rate in discharging their debts than do Chapter 13 filers in White ZIP codes.

What the Bankruptcy Researchers Found

In place of specific racial data on individual bankruptcy filers, ProPublica compared aggregated data from majority-Black ZIP codes and majority-White non-Hispanic ZIP codes.

Looking at the two most common individual bankruptcy types, Chapter 7 and Chapter 13, ProPublica found that debtors in Black ZIP codes were far more likely than those in White ZIP codes to file under Chapter 13. This is significant because the odds of successfully discharging one's debts are far lower in a Chapter 13 filing than they are via the easier Chapter 7 path.

In addition, the analysis showed that success rates in emerging from bankruptcy via Chapter 13 varied dramatically between the ZIP codes, with filers in Black ZIP codes 39% likely to successfully discharge their debts, compared to White ZIP codes' success rate of 58%.

Bankruptcies in Majority-White vs. Majority-Black ZIP Codes (2008-2010)
Bankruptcy metric White ZIP codes Black ZIP codes
Chapter 7 success rate (i.e., debts discharged) 97% 90%
Chapter 13 success rate (i.e., debts discharged) 58% 39%
Of Chapter 7 and 13 filings, percentage that are Chapter 13 26% 50%
Failure percentage of Chapter 13 filings (case dismissed) 40% 58%
Failure percentage of all bankruptcy filings (case dismissed) 12% 31%
Source: ProPublica, September 2017

Understanding Bankruptcy Filing Types

When considering bankruptcy, common parlance has many of us thinking of the phrase "filing for Chapter 11" because that's commonly used in popular culture and the media. However, there are actually six chapters of bankruptcy in the U.S. bankruptcy code.

The two most common types for an individual to file are Chapter 7 and Chapter 13. Chapter 11 is similar to 13, but it is much more complex and tends to come into play only when the debtor has significant assets. As a result, Chapter 11 is more commonly filed by businesses than by individuals.

The code also allows for bankruptcy reorganization by municipal governments (Chapter 9) and special terms for fishermen and farmers (Chapter 12). Considered the "new chapter" in bankruptcy law, Chapter 15 is the reorganization of multinational debt and is aligned with the United Nations Commission on International Trade Law (UNCITRAL).

For typical individuals, filing for bankruptcy will become a choice between Chapter 7 and Chapter 13. Chapter 7 is simpler and has a very high likelihood of fully discharging one's debts within a few months. However, secured debt like real estate cannot be protected with a Chapter 7 bankruptcy. For that reason, people who own a home often opt instead for Chapter 13 because it can protect their homes from foreclosure. The drawback is that Chapter 13 filings require a three- to five-year repayment period, and success rates are much lower than they are with a Chapter 7 filing.

Why Chapter 13 Is More Common in Black ZIP Codes

If one of the primary reasons to choose a Chapter 13 bankruptcy instead of Chapter 7 is to protect one's home, why are those in majority-Black ZIP codes choosing Chapter 13 at a higher rate, when Black Americans have a lower homeownership rate than White Americans do?

ProPublica's analysis showed that it most likely comes down to the cost of each filing type and when the fees are due. The shorter and more successful Chapter 7 option typically cost about $1,000 at the time of the study, and the fee was due upfront or within a few weeks. In contrast, Chapter 13 is often offered at $0 down to start a case. Though the ultimate cost of a Chapter 13 filing was $3,000 to $4,000, those bills come due over the duration of the filing, which typically lasts five years.

Consequently, debtors in majority-Black neighborhoods who can't pull together $1,000 or more to initiate a Chapter 7 process are opting instead for Chapter 13, which they can start for free, despite the fact that the benefit of protecting a home from foreclosure may not apply to them if they are renters.

The Bottom Line

Racial disparity between Black and White Americans who find themselves applying for bankruptcy is exacerbated by the fee structures and payment timing that surround Chapter 7 versus Chapter 13 filings. As a result, debtors who are struggling the most are nudged toward a path that is not only slower and less successful but also more expensive over time.

Methodology

ProPublica’s in-depth analysis was based on the national bankruptcy dataset from the Administrative Office of the United States Courts, which contained data for all bankruptcy cases filed from 2008 through 2015. Data was limited to consumer cases initiated either under Chapter 7 or Chapter 13 and focused on filings initiated between 2008 and 2010 because this allowed for including data on the full five-year process of most Chapter 13 filings.

Article Sources
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  1. ProPublica. "Data Analysis: Bankruptcy and Race in America."

  2. United States Courts. "Bankruptcy Basics."

  3. United States Courts. "Chapter 11 - Bankruptcy Basics."

  4. United States Courts. "Chapter 9 - Bankruptcy Basics."

  5. United States Courts. "Chapter 12 - Bankruptcy Basics."

  6. United States Courts. "Chapter 15 - Bankruptcy Basics."

  7. United States Courts. "Chapter 7 - Bankruptcy Basics."

  8. United States Courts. "Chapter 13 - Bankruptcy Basics."

  9. United States Census Bureau. "Historical Census of Housing Tables: Homeownership by Race and Hispanic Origin."