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| 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% |
Understanding Bankruptcy Filing Types
While there are a number of types of bankruptcy available to individuals, businesses, and government entities, the two most common types for individuals to file are Chapter 7 and Chapter 13.
In a Chapter 7 bankruptcy, often referred to as a “liquidation,” the debtor’s assets, except for certain exempt ones, are sold off by a court-appointed trustee. The trustee then uses that money to pay off the debtor’s creditors, typically for a fraction of what they were owed. After that, the debtor’s remaining debts are discharged, meaning that the debtor is no longer under a legal obligation to repay them. There are, however, certain types of debts that cannot be discharged, including alimony, child support, and tax obligations.
While the rules on exempt property in Chapter 7 vary from state to state, that often includes clothing, home furnishings, the money in retirement accounts, and a certain amount of equity in a home and car.
In a Chapter 13 bankruptcy, often referred to as a “reorganization” or wage earner’s plan, the debtor is allowed to keep more of their assets but must agree to a court-supervised plan to repay their debts over a three- to five-year period. If they fail to comply with the plan they can be forced into Chapter 7, in which case their assets will be liquidated.
The advantage of Chapter 13 is that it can protect the debtor’s home and other possessions, while under Chapter 7 the debtor may lose their home to foreclosure.
Of the two types of bankruptcy that individuals tend to file, Chapter 7 and Chapter 13, Chapter 7 is simpler and cheaper and relieves a person of their debt burdens much more quickly.
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, researchers have questioned why people in majority-Black ZIP codes choose Chapter 13 at a higher rate, given that Black Americans have a lower homeownership rate overall than White Americans.
ProPublica’s analysis concluded that it most likely comes down to the cost of each filing type and when the fees are due. At the time of the study, filing Chapter 7 typically cost about $1,000 in legal fees, and those fees were due upfront or within a few weeks. By contrast, law firms often offered to start a Chapter 13 filing for $0 down. Though the ultimate cost of a Chapter 13 case was $3,000 to $4,000, those bills would come due over the duration of the process, which can stretch out for five years.
Consequently, debtors in majority-Black neighborhoods who couldn’t pull together $1,000 or more to initiate a Chapter 7 proceeding were opting instead for Chapter 13, which they could start for free.
ProPublica also suggested another contributing factor. In some states, unpaid court debt or parking tickets can lead to driver’s license suspensions or revocations and even car impoundments.
As another study, in 2020, noted, “A Chapter 13 filing not only allows consumers to retain assets but also forces the return of assets that have been seized. These assets include physical property, such as cars and homes, and government permits, such as driver’s licenses. These benefits are generally unavailable in Chapter 7.”
The 2020 study looked at bankruptcy filings in Chicago, which had instituted a policy about a decade earlier allowing it to seize the cars and licenses of drivers with large amounts of unpaid traffic or parking fines. The drivers affected by those seizures, the study found, were disproportionately represented in predominantly African American ZIP codes. In addition, the study’s authors wrote, “African Americans are more likely to live in ZIP codes where cars are likely an important means of transportation” for commuting to work or going to the supermarket.
Even in cities without a seizure policy similar to Chicago’s, the authors theorized, the need to maintain access to a car may help account for the disproportionate number of Chapter 13 filings in Black communities.
How Did ProPublica Conduct Its Bankruptcy Study?
ProPublica’s 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. ProPublica’s study was limited to consumer cases initiated under either Chapter 7 or Chapter 13 and focused on filings initiated between 2008 and 2010 because that allowed for the inclusion of data on the full five-year process of most Chapter 13 filings.
Can Individuals File for Chapter 11 Bankruptcy?
While Chapter 11 bankruptcy is often in the headlines, it is primarily used by businesses. In some instances individuals will file for Chapter 11 if they don’t qualify for Chapter 13 because their debts exceed the Chapter 13 limits or they don’t have the income to fulfill a Chapter 13 repayment plan.
Can You Keep Your Car if You File for Bankruptcy?
That depends on the type of bankruptcy you choose as well as on your state and whether you own your car outright or have an outstanding loan on it. In a Chapter 13 bankruptcy, you can generally keep your car as long as you stay current on your court-supervised repayment plan.
In a Chapter 7 bankruptcy, your state may allow you to keep your car or a certain amount of equity in it. If you have a car loan, you may also be able to keep the car if you enter into a reaffirmation agreement with the lender and continue to make payments. Another option, called redemption, allows you to keep the car by paying off the loan in a lump sum.
The Bottom Line
Racial disparities exist between Black and White Americans in terms of their likelihood of filing for bankruptcy, the type of bankruptcy they choose, and their likelihood of having their debts successfully discharged. Researchers believe that the choice of bankruptcy type is driven largely by legal fees as well as by the need to keep a car for work and other purposes.