ProPublica’s study of the percentage of black debtors who file bankruptcy and fail at Chapter 13 misses the forest for the trees.
The report contends that bankruptcy lawyers steer blacks to an inappropriate chapter for the benefit of the lawyers.
In Memphis, an entrenched legal culture has made bankruptcy a boon for attorneys while miring clients… in a cycle of futility. The Atlantic
From half a continent away and from an utterly different racial neighborhood, my professional reaction as a consumer bankruptcy specialist is not bloody likely.
I can’t rule out some venial or shortsighted lawyers at work, but systemic issues are far more likely culprits than racial bias for the reported results.
Chapter 13 is tough for everyone
Nationally, two out of three Chapter 13 cases fail. A high rate of unsuccessful Chapter 13’s is predictable.
You start with economically fragile families. Add a slice of debts that must be paid through the plan. Stir in the upsets and vagaries of real life, and it’s unlikely that any troubled family’s financial life will be stable over the 3 to 5 years necessary to complete the plan and get to discharge.
Bankruptcy lawyers lose when cases are dismissed
A bankruptcy lawyer who does a “no money down” Chapter 13 is himself gambling that the client can succeed in the case so that the legal fees are paid. The odds are not good. See above.
Counting on filing Chapter 13’s to make a good living is risky at best; counting on profiting from unsuccessful cases courts a bankruptcy filing for the lawyer.
Bankruptcy law discourages Chapter 7
For starters, in bankruptcy “reform”, Congress tried to push consumers to Chapter 13, arguing that debtors should take “personal responsibility” for their debts. Chapter 7 was disfavored.
The law makes it risky and uncertain for a bankruptcy lawyer to file a Chapter 7 without payment of the fees in full, before filing. Not to mention the fact that for lawyers who offer some version of a post bankruptcy payment plan for fees, it doesn’t always work out well. Even with a Chapter 7 discharge in their pocket, paying their lawyer later for that benefit seems to lose urgency over time.
Trust me, I’ve seen that personally too often to be tempted to file without full payment.
Southern states have comparatively paltry exemption systems, so the fear of losing even ordinary possessions in Chapter 7 makes Chapter 13 seem preferable.
The poor have no excess income
To be eligible for Chapter 13, a debtor must have a regular income sufficient to pay current living expenses and have enough left over every month to fund a repayment plan.
The poor simply don’t have incomes that are realistically able to sustain plan payments.
The tangential fixes are obvious: more generous exemption systems and lawyer compensation that doesn’t require payment in full up front to file Chapter 7.
Or, simplify Chapter 7’s such that a lawyer wasn’t a necessity. Bankruptcy “reform” effectively scuttled any chance that an average Joe could represent himself. Way to go, Congress.
But we have to face the fact that the wave of desperately poor people in bankruptcy is an economic problem, not a legal problem. Until a greater slice of our population has an adequate and reliable income, and a safety net without holes, the financially strapped will use bankruptcy to stay afloat a little bit longer.
I am admittedly opining from a far distance from Memphis, Tennessee. Maybe my colleagues from the South see this situation differently. What say you?