Ideally, debtors’ circumstances and not their ethnicities should influence bankruptcy chapter choices. According to a ProPublica study from September, however, the United States falls far short of that ideal. In a series of articles, the advocacy group’s researchers discuss the significant racial disparities in debtors’ chapter choices and outcomes: Specifically, black debtors tend to file in chapter 13 when chapter 7 would be more appropriate, even when they don’t own their own homes, and their cases end up dismissed more frequently as a result. I will go into some of ProPublica’s findings and discuss their relevance to New York bankruptcy debtors.
Focusing on the Western District of Tennessee (Memphis), the authors explored why residents of Census tracts with large black populations chose chapter 13 over chapter 7. One compelling reason was the types of debts the debtors owed. Chapter 13 works best for debtors who own homes and want to keep them, but it does offer other advantages to debtors. For example, debtors who owe court debts for misdemeanors and have their driver’s licenses suspended can get their licenses back if they file in chapter 13. Sadly, many criminal laws assume people are capable of paying the scheduled fines, but when people can’t then their financial lives go into a tailspin. Thus, these debtors choose chapter 13 even though it wasn’t designed for their circumstances.
The authors also discuss the role that bankruptcy lawyers play in funneling debtors into chapter 13. Because the 2005 bankruptcy reform complicated chapter 7 bankruptcy, it now costs about $1,000 to file on average nationally. By contrast, some lawyers, particularly in Memphis, offer zero-money-down plans to potential chapter 13 debtors with the attorneys’ fees covered in the plan. This is attractive to debtors, and even though many of their cases will be dismissed, the lawyers earn enough on the cases that do make it to dismissal to make it worth their while. This has resulted in substantial market concentration in Memphis’s bankruptcy legal sector.
Poverty haunts these black communities. Debtors who are too poor to afford a chapter 7 bankruptcy choose chapter 13 as the next best alternative even though it isn’t the right fit for them. At the same time, if they had the incomes to pay their court fines, they wouldn’t lose their driver’s licenses in the first place. One area the ProPublica story did not explore is the frequency of debtors choosing insolvency over bankruptcy in these communities, and whether chronic chapter 13 filings are a part of that.
The ProPublica study is here.
When debtors are too poor to file chapter 7, no one wins, even the lawyers who file doomed chapter 13 cases. If you are struggling financially, then talking to an experienced New York bankruptcy lawyer sooner will help you get your situation under control better than waiting until you’re too poor to file.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.