Blacks at greater risk from bankruptcy system, more likely to end up with no relief than whites

Last month, a Forbes article detailed the dire state of finances for communities of color in this country. In his article, “Median Wealth of Black and Latino Families Could Hit Zero by the Middle of the Century,” Erik Sherman explains that by 2053, the median wealth of black households will be zero. According to Sherman, it is wealth inequality that continues to disadvantage black and Latino households. Though income inequality remains persistent, “wealth transfer and the advantages wealth provides—come together in ugly ways” to disadvantage these two groups, particularly black Americans.  

But there’s more. For centuries, legal structures have been used to systemically prevent blacks from obtaining wealth. By examining the modern bankruptcy system, we find yet another way that blacks are marginalized and continue to be saddled with debt. This is particularly true in the South, Memphis in particular, which has some of the highest black bankruptcy rates in the nation.

When ProPublica analyzed consumer bankruptcy filings nationwide, the district [the U.S. Bankruptcy Court for the Western District of Tennessee] stood out, both for the stunning number of cases in which debtors were unable to get relief, and for the reasons why. 

In Memphis, an entrenched legal culture has made bankruptcy a boon for attorneys while miring clients in a cycle of futility. 

Under federal bankruptcy law, people overwhelmed by debt have a choice: They can either file under Chapter 7, which wipes out debts and, since most filers lack significant assets, allows them to keep what little they have. Or they can choose Chapter 13, which usually requires five years of payments to creditors before any debts are eliminated, but blocks foreclosures and car repossessions as long as debtors can keep up. In most of the country, Chapter 7 is the overwhelming choice. Only in the South, in a band of states stretching from North Carolina to Texas, is Chapter 13 predominant.

Unfortunately, many people confuse the difference between the two. Both Chapter 7 and Chapter 13 prevent garnishments and debt collections—but unlike Chapter 7, the relief under Chapter 13 is not permanent and only lasts as long as payments are made for five years on outstanding debts.

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