| Bankruptcies in majority-white zip codes vs. majority-black zip codes (2008-2010) | ||
|---|---|---|
| Bankruptcy measures | White postal code | Black postal code |
| Chapter 7 Success Rates (i.e. Debt Cancellation) | 97% | 90% |
| Chapter 13 Success Rates (i.e. Debt Forgiveness) | 58% | 39% |
| Percentage of Chapter 13 filings among Chapter 7 and Chapter 13 filings | 26% | 50% |
| Chapter 13 Failure Rate (Case Dismissal) | 40% | 58% |
| Failure rate of all bankruptcy applications (case dismissals) | 12% | 31% |
Source: ProPublica, September 2017
Understanding bankruptcy filing types
Although there are many types of bankruptcy that individuals, businesses, and government entities can file for, the most common types of bankruptcy filed by individuals are Chapter 7 and Chapter 13.
In a Chapter 7 bankruptcy, often called a “liquidation,” the debtor’s assets (except for certain exemptions) are sold by a court-appointed trustee. The trustee then uses the money to repay the debtor’s creditors, usually paying only a small portion of what they owe. Afterward, the debtor’s remaining debts are discharged, meaning the debtor no longer has a legal obligation to pay them back. However, there are some types of debt that cannot be discharged, including alimony, child support, and tax obligations.
While the rules regarding what is exempt from tax under Chapter 7 vary by state, it generally includes clothing, household goods, funds in retirement accounts, and a certain amount of equity in your home and car.
In Chapter 13 bankruptcy, often called a “reorganization” or wage earners plan, debtors can keep more of their assets but must agree to a court-supervised plan to repay their debts. The repayment period is three to five years. If they don’t follow the plan, they may be forced into Chapter 7, in which case their assets will be liquidated.
The advantage of Chapter 13 is that it protects the debtor’s home and other property, whereas under Chapter 7, the debtor could lose the home to foreclosure.
Of the two types of bankruptcy that individuals tend to file for (Chapter 7 and Chapter 13), Chapter 7 is simpler, less expensive, and can relieve an individual’s debt burden more quickly.
Why Chapter 13 is more common in black zip codes
If one of the main reasons for choosing Chapter 13 bankruptcy over Chapter 7 bankruptcy is to protect one’s home, the researchers question why people in majority-Black ZIP codes choose Chapter 13 at higher rates, given that overall Black homeownership rates are lower than white people’s.
ProPublica’s analysis concluded that it likely comes down to the cost of each filing type and when the fees are due. During the study period, filing a Chapter 7 typically required about $1,000 in legal fees, which were due upfront or within a few weeks. In contrast, law firms were often willing to start a Chapter 13 filing with $0 down. While the ultimate cost of a Chapter 13 case is $3,000 to $4,000, those fees are paid over the course of the process, which can last five years.
As a result, debtors in majority-Black communities were unable to raise the $1,000 or more to initiate Chapter 7 proceedings and instead opted for Chapter 13, which they could initiate at no cost.
ProPublica points to another factor: In some states, unpaid court debt or parking tickets can lead to a suspended or revoked driver’s license or even a car impoundment.
Another 2020 study noted: “Chapter 13 filings not only allow consumers to keep assets, but also enforce the return of seized assets. These assets include physical property (such as cars and homes) and government licenses (such as driver’s licenses). These benefits are generally not available in Chapter 7.”
The 2020 study examined bankruptcy filings in Chicago, which about a decade ago enacted a policy allowing it to seize the cars and licenses of drivers with a large number of unpaid traffic or parking tickets. The study found that drivers affected by the attacks were disproportionately located in ZIP codes that are predominantly African American. In addition, the study’s authors wrote, “African Americans are more likely to live in ZIP codes where cars may be the primary mode of transportation,” used to commute to get off work or go to the supermarket.
The authors speculate that even in cities without foreclosure policies similar to Chicago’s, the need to retain access to cars may help explain the disproportionate number of Chapter 13 bankruptcy filings in black communities.
How does ProPublica conduct bankruptcy research?
ProPublica’s analysis is based on the National Bankruptcy Dataset from the Administrative Office of the U.S. Courts, which contains data on all bankruptcy cases filed between 2008 and 2015. ProPublica’s study was limited to consumer cases filed under Chapter 7 or Chapter 13 and focused on filings filed between 2008 and 2010 because it allows for the inclusion of data on the full five-year process for most Chapter 13 applicants.
Can an individual file for Chapter 11 bankruptcy?
Although Chapter 11 bankruptcy is often reported, it is primarily used by businesses. In some cases, individuals file for Chapter 11 if they do not qualify for Chapter 13 because their debts exceed the Chapter 13 limits or they do not have the income to meet the Chapter 13 repayment plan.
Can you keep your car if you file for bankruptcy?
This depends on the type of bankruptcy you choose and the state you live in, as well as whether you own your car outright or have an outstanding loan. In a Chapter 13 bankruptcy, you can usually keep your car as long as you stick to a repayment plan under court supervision.
In a Chapter 7 bankruptcy, your state may allow you to keep your car or a certain amount of equity in your car. If you have a car loan, you may also be able to keep the car if you sign a reaffirmation agreement with your lender and continue to make payments. Another option, called redemption, allows you to keep the car by paying off the loan in one lump sum.
Bottom Line
Racial differences between blacks and whites were found in the likelihood of filing for bankruptcy, the type of bankruptcy chosen, and the likelihood of successfully repaying debts. The researchers believe that the choice of bankruptcy type is largely determined by legal costs and the need for cars for work and other uses.
