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Study Suggests Racial Imbalance In Bankruptcy Filings

By Joseph P. Doyle  Jan. 18, 2013 11:44a

Chicago African American Neighborhoods Show Bias Towards Chapter 13

In a recent study performed by the Chicago Woodstock Institute, researchers found evidence of a racial discrepancy in bankruptcy filings throughout the city. Black clients seeking bankruptcy were found to be disproportionately likely to file for Chapter 13 debt reorganization when compared to the citywide average.

According to the study conducted by the Chicago Woodstock Institute, a non-profit research organization dedicated to investigating issues of class and economics, the disparity in the filings is very noticeable. When comparing the data, researchers with the institute found that over the past five years, in predominantly African American neighborhoods in Chicago and nearby Cook County, about 47.9% of individual bankruptcy petitions were Chapter 13 filings, contrasted with the county average of 32.8%. The discrepancy was even starker when examining mostly-white neighborhoods, where the percentage was even lower at 22.5%.

While the data clearly shows a bias in the choice of Chapter that seems to skew along racial lines, researchers argue, the explanation for this difference is not so obvious. Several authors on the paper speculated as to several possible reasons for the phenomenon, including the suggestion that unscrupulous creditors and bankruptcy firms might be pushing for Chapter 13 as a means of recouping more money for themselves.

The primary difference between Chapter 13 and the alternative, Chapter 7, lies in the means of repayment to the creditor. Under Chapter 7, the debtor's non-exempt assets are seized and liquidated in order to generate as much capital as quickly as possible, in order to provide some recompense to the creditor. In the case of lower-income clients with few assets to seize, this often results in a relatively small sum of money.

Under Chapter 13, however, the debtor agrees to a repayment plan, which stretches over three to five years, requiring the filer to pay a monthly sum until the term is up. This type of filing is often much more lucrative for the creditors, who receive a larger payout over a longer period of time. Some researchers with CWI have speculated that this might explain the discrepancy, with black debtors, often lower-income, being pressured into the longer-term repayment plan structure.

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