What Racial Discrepancies in Consumer Bankruptcy Might Say About the Commercial Sector

According to Epiq, there were 7,128 Chapter 11 bankruptcy filings in 2020 and a total of 529,068 filings across all chapters. Surprisingly, given the economic impacts of the COVID-19 pandemic, that overall number marked a 35-year low, although Chapter 11 filings were up 29% compared with 2019.

Despite data like this on Chapter 11 filings, there is a lack of research examining some of the intricate details involved, especially for smaller businesses. To date, the majority of research on Chapter 11 has been focused on large corporations. While this might lead to more headline-grabbing topics, it ignores the large portion of small businesses that make up the total filings.

Foohey says that there is a heightened focus on larger Chapter 11 cases because small business cases generally “don’t present intense financial issues,” including high leverage and multiple tiers of debt. However, by ignoring smaller businesses that file, researchers are failing to look into some of the socioeconomic differences in Chapter 11 bankruptcy, specifically potential racial discrepancies.

Discrepancies in the Nonprofit Sector

According to Foohey, roughly 75 churches per year have filed for Chapter 11 in the last 15 years and more than two-thirds of those filings were made by churches with a predominantly Black congregation. This larger proportion of filings by Black churches is made all the more striking because roughly 23.7% of the entire church population in the U.S. is made up of churches with primarily Black congregations, according to 2018-2019 data from the Association of Religion Data Archives.

Due to this inability to get any help from their lenders, Black churches resort to Chapter 11 to force mortgage modifications. The results of such filings expose the inequity in how Black churches seeking modifications are treated versus white churches. Foohey says other research has estimated that somewhere between 15% to 25% of small businesses that file for Chapter 11 reach a confirmed reorganization plan. Meanwhile, her research has shown that 65% of Black churches that file for Chapter 11 reach a consensual solution, either through a confirmed reorganization plan or a deal with the mortgage lender, meaning they ultimately get the mortgage modifications they were seeking in the first place.

Lessons from Consumer Bankruptcy

“There’s a longstanding disparity in the percentage of Black Americans as a part of their population that file bankruptcy,” Foohey says. “They face discrimination and disparities in the market, and so when you’re paying more, you’re more likely to default. Black households have more disruptions in their employment and face disparities in wages, so they make less money also. The two combined, it makes sense that they’re more likely to file bankruptcy.”

In Chapter 7, filers essentially liquidate their assets and discharge their debts. Chapter 7 usually takes six months and costs roughly $1,500 in attorney’s fees.

So why file for Chapter 13? One of the driving forces is the “no money down” aspect of the process. Chapter 7 requires upfront payment of attorney’s fees, whereas Chapter 13 allows those fees to be structured into the plan itself. Based on the CBP’s analysis, this “no money down” element is a major factor in explaining the racial discrepancies between Chapter 13 and Chapter 7.

Going further, according to Foohey, research specifically examining the racial divide in consumer bankruptcy filings has consistently shown that Black households are more likely to file for Chapter 13 versus Chapter 7. Even worse, research focusing on outcomes in Chapter 13 has shown that “one of the statistically significant variables of not succeeding [in Chapter 13] is being a Black household,” Foohey says.

“I think some of it is structural racism in the country, the legacy of racism in the country,” Lawless says, further citing concerns about access to quality legal services and implicit bias as other factors to consider. “There’s a lot of different factors here. It’s not just one thing. There’s not just one easy solution.”

“There’s no true financial reason why,” Foohey says. “In fact, it has long been accounted for by something called local legal culture, which is the influence of attorneys year over year in that area pushing one chapter versus the other chapter.”

Despite the mountain of evidence on the consumer side and the growing evidence on the commercial side, there has not been much done to combat the issue of racial discrepancies in bankruptcy. However, that doesn’t mean there aren’t ideas on how to resolve some of these disparities. One of the simplest would be to use Chapter 13 less or to simply eliminate chapter choice entirely.

“We always call for that,” Foohey says. “We call for it in every paper since the beginning of time.”

“I absolutely think that the bankruptcy system should be collecting demographic data on people who filed bankruptcy,” Lawless says. “I think it’d be very easy for the courts to do that, to implement, to do some data collection on demographics.”

Despite this, Foohey and Lawless believe that based on what we know about consumer bankruptcy and what Foohey has unearthed in the nonprofit sector, there is no reason to believe that the racial divide in bankruptcy is a purely consumer-level issue. In addition, it also may be telling about the actual financing minority-owned businesses receive.

“I don’t know [if] there are data that specifically address racial disparities in small business lending or small business workouts, but I also have no reason to think that they are any different than any other part of our society,” Lawless says.

Phil Neuffer is managing editor of ABF Journal.