Racial Bias May Steer Bankruptcy Advice, Study Says

Racial Bias May Steer Bankruptcy Advice, Study Says

Racial bias sometimes pops up in unexpected ways.

A study by researchers from the Universities of Illinois and Arizona found that in the United States, blacks are almost twice as likely as whites to file for a more complicated and costly bankruptcy filing.

The filing, called Chapter 13, is pursued disproportionately by black Americans even when controlling for outlying factors, such as homeownership.

The New York Times reports that researchers believe this may reflect racial bias within the legal community.

Unlucky 13

Chapter 13 is a bankruptcy process that allows the filer to pay back her debts over three to five years. About two-thirds of Chapter 13 filings aren't completed, which leaves the filer with the same amount of debt she had upon filing. Its alternative, Chapter 7, requires an upfront payment to dissolve a person's debts in only months.

So if Chapter 7 is so quick and easy, why does Chapter 13 exist? For one thing, it's favored by those with homes in danger of foreclosure. In repaying her debts, a Chapter 13 filer can keep her house on the agreement that she'll pay the balance. But the study showed that an equally disproportionate number of blacks who don't own homes filed for Chapter 13.

The two-part study both surveyed 2,400 American households who filed for bankruptcy in 2007, supplemented by data from the Consumer Bankruptcy Project, and sent a survey to lawyers asking for their recommendations for identical financial profiles marked with different names.

In this second part of the study, lawyers, when presented with two versions of identical finances—one labeled with traditionally black names (Reggie and Latisha) and the other with traditionally white names (Todd and Allison)—were more likely to recommend Chapter 13 filings for the couple with traditionally black names.

Why the Bias?

The researchers make clear that this isn't a deliberate case of redlining (discriminating against certain segments of the population based on racial or gender prejudice, as we heard about earlier), but that the racial bias is an innate byproduct of personal perception, which is almost scarier: Systemic discrimination can be outlawed and eliminated, but it's much harder to change the outlook of every person involved.

Fortunately, bankruptcy lawyers are doing their best—the study's findings will be presented to the National Association of Consumer Bankruptcy Attorneys for "discussion and self-reflection."

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