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Speaking of bankruptcy

Last weekend the New York Times published a page-one story on an academic study finding racial bias in an obscure corner of American life. Tara Siegel Bernard’s Times story is “Blacks face bias in bankruptcy, study says.”

What is the bias? Bernard reports:

Blacks are about twice as likely as whites to wind up in the more onerous and costly form of consumer bankruptcy as they try to dig out from their debts, a new study has found.

The disparity persisted even when the researchers adjusted for income, homeownership, assets and education. The evidence suggested that lawyers were disproportionately steering blacks into a process that was not as good for them financially, in part because of biases, whether conscious or unconscious.

The vast majority of debtors file under Chapter 7 of the bankruptcy code, which typically allows them to erase most debts in a matter of months. It tends to have a higher success rate and is less expensive than the alternative, Chapter 13, which requires debtors to dedicate their disposable income to paying back their debts for several years.

Gosh, how do a disparate number of blacks “wind up” in chapter 13 versus chapter 7? The answer isn’t blowing in the wind, but it’s close. It’s apparently from following the advice of their attorneys:

[B]ankruptcy lawyers were much more likely to steer black debtors into a Chapter 13 than white filers even when they had identical financial situations. The lawyers, the survey found, were also more likely to view blacks as having “good values” when they expressed a preference for Chapter 13.

The possible role of attorneys in the racial disparity is explored in the second part of the study:

Results from the second part of the study, which illustrated the lawyer’s influence in determining which bankruptcy chapter to choose, came from a survey sent to lawyers asking them questions based on fictitious couples who were seeking bankruptcy protection. When the couple was named “Reggie and Latisha,” who attended an African Methodist Episcopal Church — as opposed to a white couple, “Todd and Allison,” who were members of a United Methodist Church — the lawyers were more likely to recommend a Chapter 13, even though the two couples’ financial circumstances were identical.

The authors of the study suggest that attorneys are significantly more likely to recommend Chapter 13 bankruptcy to black clients than to white, at a rate that roughly corresponds to the disparity in Chapter 13 filings versus Chapter 7.

The Times reporter notes that Chapter 13 is not always an inferior choice for bankruptcy: “Many distressed borrowers go that route because they may be able to save their homes from foreclosure.” This understates the difference between the chapters.

I’m not conversant with bankruptcy law, but comparisons between Chapter 7 and Chatper 13 are easy to track down on the Internet. In general, Chapter 7 appears to provide for the debtor’s liquidation of assets in exchange for the discharge of debts in bankruptcy, while Chapter 13 provides for the debtor’s reorganization of debts under a structured repayment plan over three to five years allowing the debtor to keep non-exempt property. The treatment of attorneys’ fees can also differ between the two chapters (a factor mentioned in the Times story).

In a recent series of four columns, Thomas Sowell explored explanations other than “bias” of some kind to explain statistical disparities between and among racial and ethnic groups. (I linked to each of Sowell’s four columns in this series here.) It is certainly possible that some factor other than conscious or unconscious bias on the part of bankruptcy attorneys accounts for the disparity discussed in the Times story and related study. The Times quotes a leading bankruptcy attorney:

William E. Brewer Jr., president of the National Association of Consumer Bankruptcy Attorneys, and a practicing lawyer in Raleigh, N.C., disputed the premise of the study that Chapter 13 was always more burdensome and always required debtors to pay more to their creditors. “The study does not adequately control for the numerous complex factors that dictate chapter choice,” he said. “Having said this, Nacba intends to present the study to its members for discussion and self-reflection.”

Well, bravo. Introspection is almost always good, especially on the part of those in the legal profession. Another of the experts quoted by the Times needs to go well beyond introspection into a remedial Thomas Sowell course:

“Unfortunately I’m not surprised with these results,” said Neil Ellington, executive vice president of Consumer Education Services, a credit counseling agency in Raleigh, N.C. “The same underlying issues that created the problem in mortgage lending, with minorities paying higher interest rates than their white counterparts having the same loan qualifications, are present in all financial fields.”

The allegation of racial discrimination in mortgage lending derives from a Boston Federal Reserve Bank study whose principal author was Alicia Munnell. Sowell discusses the study at pages 40-42 of Vision of the Anointed. Christopher Caldwell recently recalled the study’s “obvious flaws”:

It did not control for creditworthiness in the most elementary way. Munnell admitted to Forbes that “there was no relationship between the racial composition of the tract and the default rate.” Had there been discrimination against blacks in lending decisions, blacks’ default rate would have been lower than that of whites. The ridicule that greeted the report did nothing to dampen the Clinton administration’s insistence on using home lending as a tool of poverty-fighting and race relations.

As for the bankruptcy study, even the authors of the study do not purport to complete understanding of what’s going on. Following publication of the Times story, two of the study’s authors discussed it in posts here and here. More study is needed!

My guess is that the bankruptcy involved here is one of ideas, as in the Boston Federal Reserve study. But maybe not. Maybe the lawyers really did it.

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