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Excerpted From: Edward J. Janger, Consumer Bankruptcy and Race: Current Concerns and a Proposed Solution, 33 Loyola Consumer Law Review 328 (2021) (50 Footnotes) (Full Document)
A series of studies have identified a persistent feature of our consumer bankruptcy system: a disproportionate number of African American debtors choose to file Chapter 13 bankruptcy instead of Chapter 7. This would not be a problem if other attributes of African American debtors meant that Chapter 13 was actually the better choice. But for reasons I will discuss, it is not. In fact, Chapter 13 is typically more expensive, less certain, and provides less complete relief than the Chapter 7 alternative. Recent legislation, the Consumer Bankruptcy Reform Act of 2020, proposed by Senator Warren and Representative Nadler (and endorsed by President Biden as a candidate) would seek to remedy this problem by creating a single consumer bankruptcy chapter for all individual debtors with debts under $7,500,000.
In this article, I will review explain the practical differences between the Chapters and why one might rationally or irrationally choose one over the other. I will then review the empirical literature on race and chapter-choice and show how the current system does not serve African American debtors well. Finally, I will describe the recently proposed CBRA and how it seeks to remedy the racial inequities embedded in the current bankruptcy system.
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In sum, the current structure of the consumer bankruptcy system has substantial disparate impact on debtors based on race. The sources of that disparate impact are diverse. They include social mores about debt repayment, judicial views about debt relief, implicit bias, and consumer bankruptcy attorneys' business model. The proposed Consumer Bankruptcy Reform Act provides a comprehensive reshaping of that system that will allow debtors and their attorneys to focus on the relief that the debtor needs: discharging debt; keeping their cars; and keeping their homes.
David M. Barse Professor and Associate Dean for Research and Scholarship, Brooklyn Law School.
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