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Personal bankruptcy is designed to give insolvent Americans a fresh start. But new research shows that Black filers are more likely to have their cases dismissed without getting any debt relief.
“The people that need a fresh financial start are really distressed, and yet it seems that bankruptcy is not working that well for some groups, especially for Black Americans,” said MIT Sloan associate professor of finance
Palmer and his co-authors of the working paper “Explaining Racial Disparities in Personal Bankruptcy Outcomes” examined data on more than 13 million U.S. bankruptcy cases from 2010 to 2022. A forthcoming update to the research shows that Black filers were 31% more likely to have their Chapter 13 bankruptcy case dismissed in court than non-Black filers.
In digging deeper, the researchers discovered that the role of the court-appointed trustee was significantly important in determining which Chapter 13 cases were dismissed without providing debt relief.
“There hadn’t really been many studies of the trustee before,” Palmer said. “The judge is the headline name who gets a lot of the attention, but it turns out that the trustee is really important.”
Here’s a closer look at the research, which was co-authored by Bronson Argyle, Sasha Indarte, and Benjamin Iverson and offers recommendations for improving racial equality in the bankruptcy system.
Trustees matter
Appointed by the court, trustees are typically given substantial leeway in examining a filer’s plan to pay back their debt to creditors and deciding whether it’s a fair plan.
Black filers are 31% more likely to have their Chapter 13 bankruptcy case dismissed in court than non-Black filers.
People seeking bankruptcy protection file either for Chapter 7 or Chapter 13. In Chapter 7, the filer must sell almost everything they have and distribute the proceeds to creditors.
In such cases, the trustee has little to do, and thus their subjective judgment typically does not factor into the judge’s decision, Palmer said. “It’s basically giving up all your assets and starting over again,” he said.
In Chapter 13, filers commit to a debt repayment plan in exchange for being allowed to keep their assets. Here, the trustee plays a more significant role, helping to determine which of a filer’s allowed expenses are valid.
“The bankruptcy trustee is like a clerk of the court — someone who is going to review all of the petitioner’s paperwork, make sure the creditors are contacted, and scrutinize the filer’s payment plan,” Palmer said.
The trustee is tasked with recommending a payment plan to the judge, who can modify the plan but generally accepts or rejects the bankruptcy filing.
In these cases, the dismissal rate — when a judge rejects the filing or the filer later fails to keep to the payment plan — is 31% higher for Black filers than it is for white filers. In digging into that number, the authors discovered a likely reason why: “The race of your trustee explains most of the gap between Black and white dismissal rates,” Palmer said.
Black filers and white trustees
The authors arrived at their conclusions by taking public data on over 13 million U.S. bankruptcy cases from 2010 to 2022 and using a deep learning algorithm to impute the race of the trustee and the filer. The algorithm relied on voter registration data from seven states that contained names, addresses, and self-reported race for over 36 million individuals.
Specifically, the authors’ research found that:
- Black filers are more likely than filers from every other race to have their bankruptcy cases dismissed without any debt relief in both Chapter 7 and Chapter 13 cases, even when controlling for many non-race characteristics.
- For Black filers in Chapter 13 cases, dismissal rates are 7 percentage points higher when they are randomly assigned to a white trustee than when assigned to a non-white trustee.
- White trustees are stricter with Black filers than they are with white filers in terms of what they consider allowable expenses, which leads to higher required payments to creditors for Black filers and higher payment plan rate failures.
Having a bankruptcy case dismissed without debt relief makes life even tougher for filers, who face a limit on how many times they can file for bankruptcy and now have attorney fees in addition to their original debt.
Improving racial equality in the bankruptcy system
The authors offered several recommendations:
1. Hire more minority trustees.
More diversity among legal decision makers could help close the racial gap in bankruptcy outcomes by improving the odds that minority filers are paired with minority trustees. The authors estimated that 84% of U.S. bankruptcy trustees are white, 8% are Black, and the remainder are roughly evenly split between Asians, Hispanics, and an “other” category.
“One thing that would be really helpful would be to increase the diversity of the trustee pool, since it so clearly has effects on outcomes for minority filers,” Palmer said.
2. Mandate the reporting of the outcome of every bankruptcy case and include information on the candidate’s race.
The authors’ results suggest that collecting data on filers’ race could be an important first step toward transparency and accountability, similar to the intent of the Home Mortgage Disclosure Act’s collection and disclosure of data on protected-class membership for mortgage applicants.
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“One of the ways that policy has tried to address discrimination in mortgage lending in the United States was by mandating that banks report what happened on every loan application, along with the race of the borrower,” Palmer said. “We don’t do that for bankruptcy, but it could be really useful because if you had that, then it would just be transparent which courts, states, trustees, and judges have big dismissal rate gaps between different races.”
3. Allow more people to file for Chapter 7.
Given how extensively Chapter 13 payment plans fail for minorities, Palmer said that we might want to rethink how well Chapter 13 works at all and allow more people to file for Chapter 7.
Chapter 7 doesn’t require a filer to repay a portion of their debt to creditors, whereas in Chapter 13, they must pay creditors all of their disposable income — the amount remaining after allowed monthly expenses — for three to five years.
“All else equal, you’d probably rather file for Chapter 7,” Palmer said. “However, unlike in Chapter 13, Chapter 7 attorney fees need to be paid up front. Given that racial disparities in dismissal rates are much lower for Chapter 7, one way we could close racial gaps would be to streamline the Chapter 7 filing process or otherwise reduce the costs of filing for Chapter 7 to help more people file for Chapter 7.”
4. Conduct training for trustees so they are more aware of their implicit bias.
A bankruptcy trustee must possess strong financial skills and complete a background check but is not required to have specific training, such as a law degree.
And day to day, trustees typically don't have a lot of time per case, putting further pressure on their decision-making. “They’re using their discretion, and they have a limited amount of data to go on,” Palmer said. “In that world, human nature seems to often lead them to make biased decisions, and it’s hard for them to ignore the filer’s race.”
Training for implicit bias could help trustees curb and check their own implicit bias. Toward that end, Palmer has already met with different organizations of trustees, including the Southern District of Florida Bankruptcy Bar Association. He plans to speak to other national conferences of bankruptcy trustees as well.
“Spreading awareness about this problem is a big step, and so would be thinking about training that would effectively help people guard against their implicit bias,” he said. “That would be the other piece of the puzzle.”
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