Abstract:
Bankruptcy law in the United States is race-neutral on its face but, in practice, race matters in bankruptcy outcomes. Our original research provides an empirical look at how the facially neutral laws that allow debtors to retain assets in bankruptcy cases result in disparate outcomes for Black and white debtors. Racial differences in asset retention in bankruptcy cases play a role in perpetuating wealth inequality between Black and white debtors.
Existing bankruptcy data lacks individual-level characteristics such as race, which inhibits researchers’ ability to adequately assess biases or unintended consequences of laws and policies on subsets of the population. Thus, we construct a novel data set using bankruptcy data from Washington D.C. in 2011 and imputing race. The data demonstrates that facially race-neutral bankruptcy laws contribute to racially disparate outcomes by allowing white debtors to keep larger amounts of both personal and real property.
First, exemption laws allow every bankruptcy filer to retain some personal property even if they do not repay their creditors in full. At the median, white filers in the District of Columbia claimed $10,150 in exemptions, relative to $8,359 for Black filers. In other words, the median white filer kept roughly $1,800 more of their property than Black filers, despite reporting similar overall personal property values.
Second, exemption laws allow every bankruptcy filer to retain some (or all) equity in their home. Unlike personal property, where Black and white debtors enter bankruptcy with about the same amount of property, white debtors enter bankruptcy with more home equity than Black debtors ($585,000 compared with $251,600 at the median). Unsurprisingly, then, white debtors also leave bankruptcy with more home equity (e.g., the median Black filer retains roughly 80% less in home equity than white filers).
Although bankruptcy laws do not inflate the value of white filers’ personal or real property values relative to Black debtors, our exemption rules contribute to white debtors leaving bankruptcy with greater wealth than Black debtors. By protecting certain assets like home equity, which are unevenly distributed in our sample across Black and white debtors, bankruptcy law appears to play a role in perpetuating wealth inequality. Even where assets are more evenly distributed, as personal property was in our sample, bankruptcy law leaves Black debtors with a less robust “fresh start” than white debtors.
Commentary:
Presumably because this is a descriptive empirical study, rather than a prescriptive policy argument, it is nonetheless unfortunate that there are no recommendations for changes that increase the equity of bankruptcy exemptions. It would seem, including from the date in this article, that any increase in exemptions, while beneficial to Black debtors, might still be of greater benefit to white debtors. Whether the detriment of any widening of the wealth gap between the cohorts of white and Black debtors exiting bankruptcy would exceed the benefits to individual debtors in protecting a greater amount of assets is perhaps an Original Position question for political philosophers.
Not practicing in Washington, D.C., I might be wildly speculating, but elsewhere case law allows for the exemption of any interest in real estate, including a leasehold (think back to the bundle of sticks from Property Law 101). This could allow an unlimited exemption in security deposits and prepaid rent as those are an "interest in real property" under D.C. Code § 15–501, providing greater equity in the liberal application of exemptions in favor of debtors, with particular benefit for Black debtors, who have disproportionate rates of renting rather than home ownership.
I am grateful that the authors of this paper have been more accurate in comparing Chapter 7 and Chapter 13 by noting that "[a]s a practical matter, however, there may be little difference in creditor recovery rates if a chapter 13 debtor lacks any 'disposable income' or a chapter 7 debtor lacks any non-exempt property." This marks a hopeful improvement in the academic literature that far too often previously routinely asserted that Chapter 13 debtors are required to pay more to unsecured creditors. In fact, both because of the Chapter 13 debtor is actually allowed to pay less to creditors, both based on Mean Test deductions for retirement contributions and because the Best Interests of the Creditors analysis allows Chapter 13 debtors to retain the hypothetical costs of liquidation (basically a secret exemption for the Trustee's Fees and Costs)).
Next maybe academics might start to revisit with a more nuanced view the success rate of Chapter 13, which may not be nearly as dour as the recurrent but perhaps dated statement that "[o]nly about one-third of chapter 13 cases end with the debtor receiving a discharge of their remaining debts."
To read a copy of the transcript, please see:
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