Black Debtors Filing Under Chapter 13 Are Increasingly Poorer

The differences between black and white debtors in Chapter 13 are even more marked than in Chapter 7. In a textbook Chapter 13 case, the debtor files to prevent foreclosure. Most debtors from majority black zip codes who filed under Chapter 13 in 2014 and 2015 did not own a home.

This phenomenon is not limited to black debtors. However, the trend among debtors from majority white zip codes in recent years was basically flat, while the number of these filings in majority black zip codes rose by 50 percent from 2010 through 2015. Of course, Chapter 13 filings overall are down since the recession, making the changing nature of the Chapter 13 usage even more stark. In 2015, Chapter 13 filings by debtors without real estate assets comprised about 40 percent of all Chapter 13 filings (up from 25 percent in 2010).

This increase is leading to a larger and larger racial asset gap among debtors who choose Chapter 13. In 2008, the typical Chapter 13 debtor from a majority black zip code had total assets worth about 67 percent of the total assets of the typical debtor from a majority white zip code. By 2015, that number was down to 28 percent.

But, crucially, Chapter 7 filings have not followed the same trend. Black debtors who choose Chapter 7 are still poorer than their white counterparts, but they are becoming comparatively less poor.

This trend of poorer black debtors choosing Chapter 13 is also evident when you look at income levels. Among white debtors, those who file under Chapter 7 tend to have far less income than those who file under Chapter 13. Among debtors from majority white zip codes in 2015, the median Chapter 7 debtor had 75 percent of the income of the median Chapter 13 debtor. But among debtors from majority black zip codes, those who filed under Chapter 13 in 2015 had about the same median income as those who chose Chapter 7.

In their recent paper,¹⁶ researchers with the Consumer Bankruptcy Project found that “no money down” Chapter 13 filings are on the rise in recent years and are particularly prevalent among black debtors. Coupled with our findings, it shows that more, and poorer, black debtors are choosing Chapter 13 because it is cheap.

In Chapter 13, Less Success for Black Debtors

So, how do black, low-income debtors fare in Chapter 13? The answer is not well.

In this section, we examine what portion of cases ultimately resulted in discharge, whether through the completion of Chapter 13 payment plans or conversion to Chapter 7. We recognize that some debtors may voluntarily dismiss Chapter 13s because their goals have been achieved. For example, a debtor files to avoid foreclosure, and subsequently obtains a mortgage modification with a mortgage servicer, removing the need for the protection of bankruptcy. As a result, a discharge rate of 100 percent is not expected.

Nevertheless, the data clearly shows that the number of discharges rise with debtors’ income. The most common reason for a Chapter 13 dismissal is the failure to make plan payments. Furthermore, at each income level white debtors fare better than black debtors.¹⁷

Statistical Analysis: Quantifying the Racial Disparity in Dismissals and Chapter Choice

So far, our analysis has relied primarily on simple, counting statistics to draw conclusions. To more rigorously evaluate racial differences, we used multivariate logistic regression. This allowed us to evaluate racial differences while holding debtor income and other characteristics constant.

For our analyses, we included all Chapter 7 and Chapter 13 cases from 2008-2010. Cases were identified as being in majority black or non-Hispanic white zip codes, and only cases in majority black or white zip codes were included in the analysis. We used multivariate logistic regression to model the relationship between race and the relevant dependent variable. Below we present the main findings of each analysis.

Logistic regression models the odds of an event,¹⁸ which is shown below. The standard error and an indicator of statistical significance are also shown. Statistical significance at the 1 percent level is indicated with three stars. Full regression results and model specifications are available in Appendix A.

1) How big was the racial disparity in the outcome of all bankruptcy filings?

Income plays a clear role in the outcome of debtors’ cases, as does the court district where debtors file. To control for these factors when analyzing the role of race, we used a logistic regression. This analysis included all filings, whether under Chapter 7 or Chapter 13. We found that for debtors living in black areas, the odds of having a case dismissed were about twice as high as those of debtors living in white areas, controlling for the court district where the case was filed, income, and other financial characteristics of the debtor.

2) How big was the racial disparity in the outcome of just Chapter 13 filings?

Using the same methods described above, we evaluated the racial difference in discharge rates for Chapter 13 cases only. We found that for debtors living in black areas, the odds of having a Chapter 13 case dismissed were about 50 percent higher than those of debtors living in white areas, controlling for district, income, and other financial characteristics of the debtor.

3) How big was the racial disparity in chapter choice?

Using the same methods described above, we evaluated the racial difference in chapter selection. We found that for debtors living in black areas, the odds of filing under Chapter 13 were more than twice as high as those for debtors living in white areas, controlling for district, income, and other financial characteristics of the debtor.

Chapter 13’s Popularity in the South Among Low-Income Debtors

Before continuing to our examination of the Western District of Tennessee, it’s important to understand a bit of context. In addition to the racial differences discussed throughout this analysis, there are also huge differences regionally in how frequently Chapter 13 is used. Only in the South is Chapter 13 the predominant form of bankruptcy.

For the purposes of discussion, the “South” consists of the states where Chapter 13 cases have accounted for at least half of filings in recent years: Alabama, Arkansas, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, and Texas.

Because there are large black populations in the South, and, as shown above, black debtors disproportionately file under Chapter 13, this means the style of bankruptcy practiced in the South particularly affects black debtors. It also means that, although we found racial disparities all over the country, it is in the South where black debtors see their cases dismissed in the greatest numbers.

An important reason why Chapter 13 bankruptcy is so popular in the South is the way attorneys are paid. In the South, it is common for attorneys to file Chapter 13s for no money up front, with the entirety of their fees paid through the Chapter 13 plan. In a sample of cases gathered by the Consumer Bankruptcy Project, 56 percent of Chapter 13 filings in the South were filed in this “no money down” fashion. The percentage was even higher (67 percent) in the districts with the highest proportion of Chapter 13 filings. Meanwhile, outside the South, only 21 percent of Chapter 13 cases were filed with $0 down.¹⁹

The “no money down” Chapter 13 arrangement has an obvious attraction for debtors with less income. As a result, large numbers of lower-income black and white debtors file under Chapter 13 in the South. In contrast, outside the South, Chapter 13 is overwhelmingly used by middle-income homeowners.

This chart, using our national dataset, shows the median annual incomes of debtors who filed for bankruptcy in 2010, broken down by the chapter they chose and whether they resided in a southern state or not:

This very strong contrast was also evident when we sorted 2010 debtors by the median household income of their zip codes. In the South, debtors who lived in communities further up the income scale were far more likely to choose Chapter 7 than those in predominantly lower income communities. Meanwhile, outside the South this is not the case:

The style of Chapter 13 practiced in the South creates two important dynamics: First, low-income debtors are more likely than debtors with more income to file under Chapter 13. Second, black debtors are more likely to file under Chapter 13 than white debtors, even at the same income level.

Western Tennessee - A High Filing Rate Driven by Black Debtors Choosing Chapter 13

Our examination of the Western District of Tennessee begins with a breakdown of filings by chapter and race. As with the national dataset, Chapter 7 filings for debtors in mostly black areas were higher and generally tracked the trend in the mostly white areas. Chapter 13 filings, on the other hand, tell a very different story. (Since we are now moving from the national level to the district, we are also moving from analysis based on zip codes to one based on census tracts.)

Bankruptcy has worked this way in Western Tennessee for decades. Since 2001, the percentage of Chapter 7 filings has been fairly stable. The only exception was a spike prior to the passage of the 2005 bankruptcy reform bill (BAPCPA) and a dip in subsequent years. The chart below shows the chapter choice mix in the years just before the passage of BAPCPA²⁰ and in recent years:

Western Tennessee - With More Income, More Likelihood of Choosing Chapter 7

As elsewhere in the South, Chapter 13 filings in Western Tennessee are most common among low-income debtors.

Below is a chart showing debtors’ chapter choice by narrow bands of monthly income (increments of $250) for the years 2011-2015. A debtor from a mostly black tract making around $3,000 per month was twice as likely as one making half that much to file under Chapter 7.

Western Tennessee - Discharge Rates are Very Low in the District, Especially for Black Debtors

As is the case nationally, the discharge rate for Chapter 13 debtors from mostly black areas in Western Tennessee is lower than that of debtors from mostly white areas, even when comparing debtors at the same income level. Below is a chart showing the discharge rate for debtors in the same income group for cases filed from 2008 through 2010. (We grouped by slices of $20,000, so low-income is annual income below $20,000, low-mid income is between $20,000 and $40,000, etc.)

Together, the racial disparities in chapter choice and Chapter 13 discharge rate in the district combine for a striking result: Even though residents of mostly black areas file for bankruptcy in much higher numbers than residents of white areas, they actually receive far fewer discharges. Below is a breakdown of all filings regardless of chapter for the years 2008 through 2010. With Chapter 7 and Chapter 13 filings combined, there were almost 8,000 more filings by debtors from mostly black census tracts over these years, but debtors from mostly white tracts received almost 3,000 more discharges.

Western Tennessee Statistical Analysis: Racial Disparities Persist Even Controlling for Income and Other Debtor Characteristics

As with the national analysis, we used multivariate logistic regression to evaluate three key questions about the role of race in the district while holding constant debtor income and other characteristics. The analysis included cases from 2008-2010. Cases were identified as being in majority black or non-Hispanic white census tracts, and only cases in majority black or white census tracts were included in the analysis. Full regression results and model specifications are available in Appendix A.

1) How big was the racial disparity in the outcome of all bankruptcy filings?

Using the methods employed to analyze the national data, we evaluated the disparity evident in both Chapter 7 and 13 filings in the Western District of Tennessee. For debtors living in mostly black areas, the odds of having a case dismissed were about 2-1/2 times as high as those for debtors living in mostly white areas, controlling for income and other financial characteristics of debtors.

2) How big was the racial disparity in the outcome of Chapter 13 filings?

For debtors living in mostly black areas, the odds of having a Chapter 13 case dismissed were about 70 percent higher than those of debtors living in mostly white areas, controlling for income and other financial characteristics of debtors.

3) How big was the racial disparity in chapter choice?

For debtors living in mostly black areas, the odds of filing under Chapter 13 were two-and-a-half times as high as those for debtors living in mostly white areas, controlling for income and other financial characteristics of debtors.

Western Tennessee - Many Black Debtors Are Ill-Suited to Chapter 13

The financial profile of debtors in the district shows that black debtors are particularly ill-served by the predominance of Chapter 13.

Below is a breakdown of the median value of several financial categories,²¹ by race and chapter. We have bolded the most important categories.

Clearly the median debtor, both black and white, is low-income, but black debtors filing under Chapter 13 stand out as particularly poor. The financial profile of Chapter 13 debtors in Western Tennessee is vastly different than that of Chapter 13 debtors nationally. Below are four metrics that underscore how ill-suited many district debtors are for Chapter 13:

1. Debtors from mostly black census tracts in Western Tennessee who chose Chapter 13 had less income than those who chose Chapter 7. Usually, the inverse is true. Nationally, the median Chapter 7 debtor in 2015 had 82 percent of the median Chapter 13 debtor’s income.²²

2. Debtors from mostly black tracts in Western Tennessee who chose Chapter 13 were poorer in terms of assets than those who chose Chapter 7. Nationally, the median Chapter 7 debtor in 2015 had 28 percent of the total assets of the median Chapter 13 debtor.

3. Debtors from mostly black tracts in Western Tennessee who chose Chapter 13 actually had less in secured claims than those who chose Chapter 7. Nationally, the median Chapter 7 debtor in 2015 had 22 percent of the median Chapter 13 debtor’s secured debt.

4. Debtors from mostly black tracts in Western Tennessee who chose Chapter 7 had dramatically more in unsecured claims than those who chose Chapter 13. On the face of it, this might seem normal, since Chapter 7 is the ideal chapter for dispensing with unsecured debt. However, the scale of this difference (three times as much) is unusual. Nationally, the median Chapter 7 debtor in 2015 had 163 percent as much unsecured debt as the median Chapter 13 debtor.

Chapter 13’s supporters generally tout it as a potentially superior choice for debtors burdened by secured debt and particularly those facing foreclosure. But debtors from mostly black tracts in Western Tennessee tend to have less secured debt than the debtors ending up in Chapter 7. Compounding that discrepancy, their low income makes it highly likely their cases will be dismissed.

In contrast, the typical debtor from a mostly black census tract filing under Chapter 7 has higher income, making it more likely they can afford the attorney fee for Chapter 7, and a disproportionately large load of unsecured debt, making it manifestly unwise to choose Chapter 13.

Western Tennessee - Repeat Filing is Common, Especially Among Black Debtors

Another indication that Chapter 13 is a perilous choice is the surprising number of debtors who have filed repeatedly under Chapter 13 in a relatively short period of time. Below is a breakdown, by race and chapter, of filings in the last quarter of 2015. We counted how many times each debtor had filed in the previous five years²³ (from 2011-2015), and the chart below shows what portion of debtors were filing for the first time since 2011, the second, etc.:

Part of what drives this churn is not only a high rate of Chapter 13 plan failures, but the speed with which they fail. Twenty-three percent of the cases filed in 2015 were dismissed within the first three months. Forty percent were dismissed within the first six months.

Western Tennessee - The Types of Debt Driving Debtors to Chapter 13

Certain kinds of debt help explain why some debtors may be choosing Chapter 13 over Chapter 7, and, to some extent, the racial disparities in the district.

We analyzed the creditors who registered claims against debtors who filed under Chapter 13 in 2010. This analysis was based off of court records obtained for a random sample of 2,394 Chapter 13 cases, about 20 percent of those filed in the district in that year. We then categorized claimants by type of creditor.²⁴ There are drawbacks to this technique. Some major creditors/claimants, namely debt buyers, don’t clearly show the source of debt. However, the patterns we identified are very strong and were supported by interviews with attorneys, trustees and judges in the district.

The four categories of debt that are most important to understanding the dynamics of the district are: mortgage, auto, court debt (mostly related to traffic offenses) and utility. The key categories of debt were determined by analyzing the percentage of cases that included each type of debt and how often each type of debt was the largest.

Mortgages:In 2010, most debtors from mostly white census tracts who filed under Chapter 13 had real estate assets (this was not true in more recent years). A mortgage was the largest debt in at least 38 percent of cases filed by these debtors in our sample. For debtors from mostly black census tracts, a mortgage was the largest debt in at least 27 percent of cases.

Filing a Chapter 13 makes sense for someone who is behind on a mortgage because it places an automatic stay on the debt, allowing the debtor to catch up and avoid foreclosure.

In 2010, debtors from mostly black tracts had real estate assets in only 41 percent of Chapter 13 cases. That portion has continued to drop in the district. In 2015 only about a quarter had real estate assets. As a result, auto debt is probably the leading driver of bankruptcies in more recent years.

Auto loans:This was a distant second largest debt for debtors from white tracts, but a close second (20 percent) for debtors from black tracts. The predominant lenders for debtors from mostly black tracts were subprime indirect lenders like Credit Acceptance and Santander. Bankruptcy attorneys told us that debtors often sought bankruptcy protection to avoid having a car repossessed.

Court debt: In our sample, 29 percent of debtors from black tracts had this kind of debt (compared to 9 percent of debtors from white tracts), and for 6 percent of cases, it was the largest debt. The vast majority of this debt came from Shelby County’s General Sessions Criminal Court, which handles traffic cases and misdemeanors. In interviews, bankruptcy attorneys said this was generally related to driver’s license issues. Nonpayment of a court debt can lead to suspension of a driver’s license, and debtors often file under Chapter 13 either to prevent suspension of a license or to have their licenses reinstated. Debtors’ driver’s licenses are generally reinstated upon confirmation of their cases. This type of debt is not dischargeable in a Chapter 7.

The racial disparity for this kind of debt in bankruptcy cases is reflective of a disparity in the suspension of driver’s licenses. We obtained data on driver’s license suspensions in Shelby County and found that suspensions stemming from traffic infractions (the most common source of a suspension) were six times more common among black residents than white residents.²⁵

Utility debt: Nearly half the debtors from mostly black census tracts had utility debt, which consisted almost entirely of bills owed to Memphis Light, Gas and Water. Only a quarter of debtors from white tracts had this kind of debt. For about 5 percent of debtors from black tracts, this was their largest debt.

Although we do not have data that speaks directly to racial disparities in utility debt in Memphis, federal survey data²⁶ does show that black low-income households in the South have their electricity disconnected at twice the rate of low-income white households.

Attorneys told us that debtors often filed a Chapter 13 bankruptcy in order to prevent a shutoff of service or to regain service.

Why are these debtors choosing Chapter 13? Most likely because it is affordable. The median MLGW debt in our sample was around $1,100. If these debtors had the money to hire an attorney to file a Chapter 7, it seems likely they would have used that to pay their utility bill. Additionally, while the debt is dischargeable in a Chapter 7, discharging the debt would not achieve the goal of regaining service. In order to connect service, MLGW currently requires a $400 deposit from residents who have had debt written off within the last six years.

Of course, there are other noteworthy types of debt beyond these four categories. However, no others demonstrated similarly outsized racial disparities. For example, about half of all debtors had outstanding medical debt, but this was the largest type of debt only about 3 to 4 percent of the time. Student loans, tax obligations, debt buyers (the most common form of debt) and credit cards (which skewed strongly white) are other categories worth mentioning.

Finally, it is hard to gauge the role of garnishments in driving debtors to file for bankruptcy, but it is surely significant, and it is something that bankruptcy attorneys in the district mentioned when they listed reasons that people file. Creditors who get court judgments against debtors can pursue garnishments. In Tennessee, these allow creditors to take up to a quarter of debtors’ wages and zero out their bank accounts. We pulled data on garnishment cases in Shelby County’s General Sessions court and counted garnishment actions on 22,266 separate cases in 2010 alone. As we detailed in our 2015 paper on racial disparity in debt collection lawsuits, such court judgments are twice as common in black communities, holding income constant. Of course, Chapter 7 would generally be a better fit for debtors struggling with a garnishment, since the debt is unsecured, but we spoke with debtors in Memphis who had filed under Chapter 13 in response to a garnishment.

The most common garnishment actions in Shelby County are brought by hospitals,²⁷ auto lenders like Credit Acceptance that are collecting deficiency judgments on already repossessed vehicles, and debt buyers collecting on old debts (usually credit cards).

Western Tennessee - The Highest Volume Firms Account for an Outsized Portion of Filings and Exhibit Higher Racial Disparities

To examine the role of bankruptcy attorneys in the filings, we used the district data set, which identified the attorney for each case, and interviews with attorneys.

A few law firms (and at least since the 1990’s, the same ones) account for a large number of Chapter 13 filings. This concentration means that the customs and practices of a handful of lawyers have had a large effect on filings in the district.

Since 2001, the same five law firms in the district have dominated Chapter 13 filings. Chapter 7 filings have a little more variation, with only two of the five firms remaining constant across all three blocks of years.

An examination of the high-volume Chapter 13 firms found that their cases displayed greater racial disparities. For the district, the rate of Chapter 7 cases as a percentage of all filings was 2.1 times higher for debtors from mostly white census tracts than it was for debtors from mostly black tracts. For these large firms, the “White/Black Chapter 7 Ratio” as we call it in the table below, was even higher, while the ratio for smaller firms was lower.

There are, of course, law firms with less volume than these top five firms that have similar (or even much greater) racial disparities. The customs of these firms are not unique to them, but studying how they operate is important to understand the dynamics of the district.

Western Tennessee - Differences Among The Largest Firms

The top Chapter 13 firms are alike in that they all file almost exclusively under Chapter 13 for their clients, but we also found important differences.

First, there is one clear outlier: Teel & Maroney has a much whiter clientele than the others. This is likely because the firm is located in Jackson, the county seat of a majority white county, as opposed to all the other firms, which are located in Memphis.

The four remaining firms can be broken into two groups. Both Jimmy McElroy, the long-reigning Chapter 13 champion of Memphis, and the Hurst Law Firm advertise on television. They also have a clientele that is relatively higher income, at least when compared to the full population of district filers.

Cohen & Fila and Long, Umsted, Jones & Kriger have very low-income clients and don’t advertise on TV, instead relying exclusively on word of mouth (Long, et al doesn’t even have a website). They have more clients with court or utility debt, which are more common among low-income debtors. The firms have correspondingly low discharge rates, the main difference between the two being a higher rate of Chapter 7 conversions at Cohen & Fila.

The differences between the two groups are evident when you examine what portion of each firm’s clientele are repeat filers. The following breakdown is for 2015 and shows what portion of each firm’s Chapter 13 filings in 2015 were for debtors who only filed once from 2011 to 2015 and what portion were for high repeat filers (those who filed four or more times in that span of time):

It’s possible that the TV advertising by McElroy and Hurst brings in new clients, thus leading to a higher rate of unique filings. Long, Umsted, Jones & Kriger and Cohen & Fila, meanwhile, file a Chapter 13 cases for debtors who have not filed in the previous five years only about a third of the time. Often the repeat filings are for regular clients of the firm. Here, for instance, is an example of a client of Cohen & Fila who has filed 17 times since 2004,²⁸ all with the firm.²⁹ In the debtor’s last filing in December 2015, she declared a current monthly income of $520. Her sources of income were disability, child support and food stamps.

Western Tennessee - How Debtor Attorneys are Paid

No-money-down Chapter 13 cases have been predominant in Western Tennessee for as long as the judges, trustees and attorneys in the district can remember. About 71 percent of Chapter 13 cases in 2010 were filed with no money paid to the attorney prior to filing.³⁰ For other cases, the average amount paid up front was $326.

To examine debtor payments to attorneys in Chapter 13 plans, we used our sample of 2,394 cases³¹ from 2010 (approximately 20 percent of the Chapter 13 cases filed that year). From these cases, we extracted information from the Trustee’s Final Report, which lists the amount debtors paid through the plan to attorneys in addition to creditors. We also had the attorney’s fee as disclosed in the order confirming the debtor’s proposed plan.

Of the top five high-volume Chapter 13 filers, four firms always or nearly always filed with $0 down. McElroy’s firm filed with $0 down in 83 percent of cases. The exception, he told us, is typically for debtors who have filed multiple times in recent years (we heard other attorneys say the same). For those cases, the average amount paid up front was $213.

The exception was Long, Umsted, Jones & Kriger. However, their average up-front payment was a nominal $30.

The standard Chapter 13 attorney fee for the district was until recently $3,000. However, with such a low discharge rate, attorneys rarely received that full amount. The trustees distribute payments to attorneys over time through the plan, meaning that attorneys typically do not approach full payment until the fifth year of the plan.

Accordingly, we found that the median payment to attorneys through a Chapter 13 plan for cases filed in 2010 was $861. The average payment (boosted by the minority of cases that reached discharge) was $1,249. When you add the average up-front payment of $94, you get an average total earned attorney fee of $1,343 per Chapter 13 case for the district.

Using our payment data, we estimated the earnings³² from Chapter 13 cases by the highest volume debtor attorneys for cases filed in 2010. We found that, even though attorneys generally don’t receive the stated Chapter 13 attorney fee of $3,000, they still pull in substantial revenue.

In particular, even though less than a quarter of McElroy’s Chapter 13 cases reached discharge, his firm still reaped significant revenue. Meanwhile, Teel & Maroney, with its whiter clientele and higher discharge rates, outperformed its market share. The two firms with the lowest income client base (Long, Umsted and Cohen & Fila) underperformed their market share.

Finally, this data complicates the argument by some scholars that these attorneys steer their clients to Chapter 13 because of the higher $3,000 fee. In actuality, the average amount earned for Chapter 13 cases in the district was only a few hundred dollars more than the average attorney fee for a Chapter 7 filing, which was around $885.³³ Instead, we believe the balance of the evidence suggests that the difference in down payments between Chapter 13 and Chapter 7 is more important.

Western Tennessee - Examples of Attorneys Who File More Chapter 7 Cases for Black Debtors

To understand how the racial disparities in Western Tennessee might be alleviated, we looked at attorneys who, with a similar client pool as the highest volume attorneys (black debtors in the Memphis area), were filing under Chapter 7 more often or achieving higher Chapter 13 discharge rates.

We focused on two attorneys, Brad George and Jerome Payne, with mid-volume bankruptcy practices filing around 200 cases per year. To supplement the data, we interviewed both attorneys extensively.

The two firms are notable for different reasons. George has a much higher Chapter 13 discharge rate than is typical for the district and files a similar number of Chapter 13 and Chapter 7 cases for his black clients. Payne is one of the relatively few black bankruptcy attorneys in the district. For the period 2011-2015, he filed the most Chapter 7 cases on behalf of debtors from mostly black census tracts of any law firm. In both practices, Chapter 7 cases are slightly more common for white clients than for black clients, but the disparities are far smaller than is typical in the district.

In order to provide a direct comparison with the highest volume practices, here are versions of the same tables that we produced above.³⁴

Why are these attorneys filing more Chapter 7 cases?

There is evidence, both in the attorneys’ stated philosophies and in the data, that they more readily consider Chapter 7 than other attorneys in the district.³⁵

“I think you should try and always, always, always do a [Chapter] 7,” is how George put it. (We should also note that neither attorney shunned Chapter 13. Both said it was the best solution in certain situations: for instance, with court debt.)

As for the data, it’s evident these attorneys have a dramatically different approach for evaluating the suitability of Chapter 13. Above, we identified four concerning metrics when it came to black debtors in the district: Black Chapter 13 debtors tend to have less income, fewer assets, less in secured claims, and dramatically less in unsecured claims than black Chapter 7 debtors.

For George and Payne, the first three of these metrics aren’t true and the last is less extreme. In the chart below, we compared the financial profiles of the median Chapter 7 debtor to that of the median Chapter 13 debtor from a mostly black census tract. We compared the clients of George and Payne to those of McElroy, who has clients with a similar median income and the highest volume practice.

Attorney fees are also clearly a factor. Neither George nor Payne file Chapter 13 cases for $0 down. George said he requires between $140 and $240. For Payne, it’s $250-$500.

Their Chapter 7 fees are also notable. George requires $550-$590 (low for the district), with $480 up front, although he will accept $400 in emergency cases, he said.

Payne’s typical fee is around $1,200, higher than most attorneys, but his office is very flexible with payment plans, and as a result, cases are often filed with only $200-$400 down.³⁶ The total fee can also change depending on the resources of the debtor, he said. Payne was candid in saying that his clients will sometimes not make all the payments due, but he did not have data for how often that happened.

The way that George and Payne price their services make the Chapter 7 versus Chapter 13 decision very different. Typically debtors have a choice between paying $0 down to file under Chapter 13 or having to produce around $1,000³⁷ in a relatively short period of time³⁸ to file under Chapter 7.

With George, debtors choose, in the short term, between paying around $200 up front for a Chapter 13 or coming up with $480 for a Chapter 7. With Payne, the down payment alternatives are about the same. This has the effect of diminishing down payments as a factor in the debtor’s choice of chapter.

Both Payne and George thought that their fee structures were important drivers of the higher number of Chapter 7 cases at their firms.

Western Tennessee - Discussion of Contributors to The High Rate of Chapter 13 Cases

Our analysis found that two primary factors contributed to the high rate of Chapter 13s among black debtors.

1. The types of debt. Mortgage, auto, court, and utility debt all provide reasons to file under Chapter 13 as opposed to Chapter 7. In particular, court and utility debt problems might be disproportionately borne by black debtors and exacerbate racial disparities in the bankruptcy system as a result.

2. The attorney, as a result of fee structure and guidance. We contrasted two attorneys with higher Chapter 7 filing rates to the largest firms in the district. Tellingly, these two attorneys differed from the high volume filers both in what sort of debtor they were putting into each chapter (judging by the financial profile of their debtors) and in fee structure (by avoiding $0 down Chapter 13 cases and making Chapter 7 fees more flexible).

These two factors are not distinct - and in fact can be very hard to disentangle. Debtors with very low income are more likely to have court or utility debt, and since these debts are unsecured, on paper the debtor might appear to be spectacularly unfit for Chapter 13 when in fact there are defensible reasons for filing that way. These are debtors who are also less likely to be able to afford any attorney fee that’s more than nominal, thus predisposing them to Chapter 13 even if Chapter 7 were preferable.

All that said, the abysmal discharge rates in the district mean that Chapter 13 is a troubling choice for many, if not most, debtors who file under that chapter. Further, the extreme differences between attorneys like Payne and George and the highest volume attorneys suggest that a very substantial percentage of Chapter 13 debtors would be better off filing under Chapter 7. In 2015, less than 20 percent of filings by debtors from mostly black census tracts were through Chapter 7. It is hard to say whether that number ought to be 40 percent or 60 percent, but it is clear it should be significantly higher.

Northern Illinois - A District Emulating Memphis in Recent Years

Since 2012, the Northern District of Illinois has experienced an increase in Chapter 13 filings as Chapter 7 filings have declined. This trend is driven entirely by black debtors,³⁹ and almost entirely by those without real estate assets. In certain respects, there are strong similarities to the way the Western District of Tennessee has operated for years.

As above, we start with per capita filing patterns by race in the district, for both Chapter 7 and Chapter 13:

The rise in Chapter 13 filings has been particularly sharp among lower-income filers. The median annual income⁴⁰ in 2015 for a Chapter 13 debtor from a mostly black census tract was $25,241, down 39 percent (inflation adjusted) from 2008.⁴¹

Like the Western District of Tennessee, black Chapter 13 debtors in the Northern District of Illinois have tended to have lower incomes than black Chapter 7 debtors in more recent years (2014 and 2015). These are debtors largely without real estate assets. Seventy-nine percent of Chapter 13 debtors from mostly black tracts declared no real estate assets in 2015, a portion even higher than what we found in the Western District of Tennessee that year.

Also like Western Tennessee, the largest bankruptcy firms are an important force in determining the dynamics of the district. In Northern Illinois, the recent surge in filings appears to be driven mostly by the growth in filings at one particular law firm, the Semrad Law Firm, also known as DebtStoppers.⁴² Below, we show the growth in market share of the top bankruptcy firms in Northern Illinois. The top two firms accounted for 46 percent of Chapter 13 filings in 2011-2015, up from 13 percent in 2001-2005. And as in the Western District of Tennessee, a broader array of attorneys file under Chapter 7.

From 2012-2015, DebtStoppers accounted for 29 percent of all Chapter 13 filings, and based on our data, 69 percent of their clients resided in mostly black census tracts. As a result, the firm actually accounted for 40 percent of filings by Chapter 13 debtors from mostly black tracts during that period. The firm seems to specialize in Chapter 13: Only 22 percent of filings were under Chapter 7.⁴³

This rise in Chapter 13 filings in Northern Illinois by lower income black debtors is concerning because these debtors are unlikely to reach discharge.⁴⁴ Below are the district’s discharge rates for debtors, broken out by income groupings and race, for Chapter 13 cases filed from 2008 through 2010:

As we did in the Western District of Tennessee, we examined the types of debt common among a sample⁴⁵ of Chapter 13 debtors, as evidenced by claims made by creditors. Our sample was from 2010, the height of the foreclosure crisis, so predictably mortgage debts played a very large role and were far and away the largest debt.⁴⁶

However, as in Western Tennessee, we found large amounts of traffic-related debt, mainly owed to the City of Chicago. Even with mortgages driving the Chapter 13 filing patterns in 2010, we found that 45 percent of the debtors from mostly black tracts in our sample had traffic debt. For 8 percent of debtors, this was their largest debt. Tellingly, that number rose to 16 percent when we focused just on debtors who did not own a home.

In a recent examination of bankruptcy filings in Cook County,⁴⁷ Illinois (which comprises the bulk of filings in the Northern District), Edward Morrison and Antoine Uettwiller of Columbia Law School came to the conclusion that fines from state and local governments (mainly parking tickets) were a primary driver of the racial disparities in the district. Black debtors often chose to file under Chapter 13 in order to prevent the seizure of a car or suspension of a driver’s license,⁴⁸ they found.⁴⁹ And since these debtors tended to have lower incomes, they were failing to complete their Chapter 13 plans at higher rates.

Northern Illinois - Important Differences with Memphis

All that said, the rise in Chapter 13 filings by black debtors in Chicago does not mean that the district has completely morphed into Memphis.

First, the Northern District of Illinois only matched one of the four concerning metrics we found in the Western District of Tennessee: The median income of Chapter 7 debtors from mostly black census tracts is higher than the median income of Chapter 13 debtors. But black Chapter 13 debtors in the Chicago-area still tend to have more assets than Chapter 7 debtors (although the difference is narrowing), secured claims still tend to be larger in Chapter 13 cases, and the difference in unsecured claims between Chapter 7 and Chapter 13 cases is fairly normal by national standards.

Second, even with the steep increase in Chapter 13 filings, debtors from mostly black census tracts still filed under Chapter 7 about 40 percent of the time in 2015. That is twice the rate of Western Tennessee (17 percent in 2015).

Third, the debt mix is different. Auto debt appears to be much less of a salient factor in Chicago than in Memphis. Further, utility debt was fairly common in Chicago (46 percent of debtors from mostly black tracts, according to our sample), but it was extremely rare for it to be the largest debt. Based on our findings and those of Morrison and Uettwiller, it appears that court/traffic debt is much more of a dominant factor in Northern Illinois filings than in Western Tennessee.

Northern Illinois Statistical Analysis: Racial Disparities Persist Even Controlling for Income and Other Debtor Characteristics

As with the national analysis, we used multivariate logistic regression to evaluate three key questions about the role of race in the district while holding constant debtor income and other characteristics. The analysis included cases from 2008-2010. Cases were identified as being in a majority black or non-Hispanic white census tract, and only cases in majority black or white census tracts were included in the analysis. Full regression results and model specifications are available in Appendix A.

1) How big was the racial disparity in the outcome of all bankruptcy filings?

Using the methods employed in the analysis of the national data, we evaluated the disparity evident in all filings in the Northern District of Illinois. For debtors living in black areas, the odds of having a case dismissed were about four times as high as those of debtors living in white areas, controlling for income and other financial characteristics.

2) How big was the racial disparity in the outcome of Chapter 13 filings?

For debtors living in black areas, the odds of having a Chapter 13 case dismissed were about 70 percent higher than those of debtors living in white areas, controlling for income and other financial characteristics.

3) How big was the racial disparity in chapter choice?

For debtors living in black areas, the odds of filing under Chapter 13 were about four times as high as those for debtors living in white areas, controlling for income and other financial characteristics.

Areas for Further Inquiry - Districts with Worrying Chapter 13 Patterns

As our national analysis showed, racial disparities pervade the bankruptcy system. But there are certain districts where it is especially clear that debtors are being poorly served because of an overreliance on Chapter 13. How might we identify other such districts that are worthy of scrutiny - and, potentially, reform?

We used our four metrics to identify problem districts. Meeting one of these metrics might indicate that a large number of debtors in the district are filing under Chapter 13 when they would be better off under Chapter 7.

The metrics, again, are: The median Chapter 13 debtor had less income, was poorer in terms of assets, had less in secured claims, and had dramatically fewer unsecured claims than the median Chapter 7 debtor.

We looked at these metrics for each district (all filings, not limited by race) for the time period 2013-2015. We calculated the median Chapter 7 debtor’s value as a percentage of the median Chapter 13 debtor’s value and found that 14 of the country’s 91 districts⁵⁰ met at least one of these metrics. All but one had higher Chapter 13 filing rates than the national rate of 33 percent of all filings. The only districts that met all four metrics were Western Tennessee and Southern Georgia. Two other districts, Northern Illinois and Northern Alabama, met two. To perform this analysis we calculated the median value for all filings in each district, by chapter, for 2013-2015.

Below we show the 14 districts that met at least one metric, shading the cells blue where the district crossed the threshold for the metric. Again, each field provides the median Chapter 7 value as a percentage of the median Chapter 13 value for each district.

Areas for Further Inquiry - The Higher Rate of Chapter 7 Filings in North Georgia

The Northern District of Georgia is a notable exception to the list above. $0 down Chapter 13 cases are common in the district, and the Atlanta area has a large black population.

But almost half of filings in the mostly black zip codes in the Northern District of Georgia from 2013 through 2015 were under Chapter 7. That was more than double the rate in the mostly black zip codes in the rest of the state.

The highest-volume firm in the Atlanta area is Clark & Washington, according to our review of filings in the district for 2010 and 2014,⁵¹ when the firm filed the most Chapter 7 and Chapter 13 cases. Crucially, the firm offers a Chapter 7 installment plan for $0 down.⁵² One example we reviewed from 2014 involved $150 payments spread out 10 months.

Chapter 7 installment plans are not common in most districts because the bankruptcy attorney risks violating the automatic stay on debts or the discharge by collecting fees after the case commences.

In recent years, Clark & Washington dealt with this issue by collecting fees via a dual contract arrangement: one prior to filing (involving $0 in attorney fees) and the second after the petition is filed (involving the full fee). The arrangement was upheld⁵³ in 2012 by a judge in the Middle District of Florida, where Clark & Washington also have offices. More recently, a 2015 decision by the chief judge in the Northern District of Georgia approved the use of post-dated checks to pay attorney fees over several months, and Clark & Washington and other large firms in the district subsequently switched back to a single contract arrangement.⁵⁴

The availability of a Chapter 7 installment plan appears to have resulted in a much higher rate of Chapter 7 filings. Tellingly, 54 percent of Clark & Washington’s filings were under Chapter 7 in the years we examined, which was about the same as the total for the district, 56 percent. As we have shown above in our discussions of Western Tennessee and Northern Illinois, the highest-volume firms in a district can have an outsized effect on the filing patterns there.

Together with the examples of attorneys in the Western District of Tennessee who file a higher number of Chapter 7 cases for their black clients, the striking contrast of Northern Georgia with the rest of the state provides more evidence that flexibility with Chapter 7 attorney fees is an important factor in mitigating high Chapter 13 rates and potentially reducing racial disparities in chapter choice.

Appendix A: Regression Results

We used multivariate logistic regression to evaluate racial differences in chapter choice and outcomes while holding debtor income and other characteristics constant.

For our analyses, we included all Chapter 7 and Chapter 13 cases from 2008-2010. 2008 is the first year we have data for, and 2010 is the last year for which we have the final dispositions for almost all cases. Cases were identified as being in majority black or non-Hispanic white areas, and only cases in majority black or white areas were included in the analysis. List wise deletion was used to exclude cases with missing data or data quality issues, which removed about 4 percent of all cases.

The log of current monthly income was included as a covariate. As is common practice, cases where current monthly income was reported as zero dollars were included in the continuous log measure as if they had one dollar of income. An additional binary variable was included in the model to identify those cases. The log of secured debts was also included as a covariate, handling cases with no secured debts in the same manner. Log current monthly income and log secured debts were measured in 2015 inflation-adjusted dollars.

A binary variable indicating cases where the debtor held real estate assets was included. The ratio of secured to total debt was also included as a covariate. In the national analysis, fixed effects for court district were included. Because there are 91 court districts in the country, model estimates for court districts are not shown. Court district was not included in the Tennessee-West or Illinois-North models because the models were within a single court district.

Cases were categorized as dismissed if they had some form of disposition, but did not result in a discharge. This included the small percentage of cases (about 2 percent of dispositions) where the debtor did not receive a discharge for failure to provide certification of the financial management course.

Adjusted odds ratios, standard errors, and p-values are reported. Two-sided z-tests were used to test the null hypothesis that dismissal (or chapter selection) is independent of race. Stars indicate p-values at the follow levels: *** less than 1 percent; ** less than 5 percent; * less than 10 percent.

All analyses were conducted using R statistical software.