Race Matters in Bankruptcy

I. IntroductionBankruptcy laws are not designed to redress racial wrongs. Indeed, individuals were entitled to debt relief long before this country enacted laws designed to provide relief from racial discrimination. Because bankruptcy laws provide a complex set of remedies to financially distressed individuals and appear to be race neutral, it is not surprising that they have never been examined through a racial lens even though blacks and Hispanics appear more likely to file for bankruptcy than whites.1 A critical examination of bankruptcy laws suggests that, in designing the type of relief to make available to potential debtors, Congress either consciously or unconsciously exhibited a bias in favor of a specific demographic profile.2 Specifically, to benefit the most from bankruptcy laws, the "Ideal Debtor" should be a married, employed homeowner who (1) is the beneficiary of a spendthrift trust or has a large employer-provided retirement account; (2) has high, but reasonable, living expenses; (3) provides financial support only to legal dependents; and (4) has little (or no) student loan, alimony, or child support debt. Because statistical data suggest that white people are more likely to fit the Ideal Debtor profile, race matters in bankruptcy.Part I of this Article discusses the goals and structure of bankruptcy relief and explains that debtors generally have the right either to discharge some debts, repay few debts, and keep certain specified property in a Chapter 7 proceeding, or to discharge more debts, repay some debts, and keep considerably more property in a Chapter 13 proceeding. By permitting debtors to keep tangible property, but not income, the federal Bankruptcy Code (the "Code")3 systematically favors debtors with wealth. Part II of the Article presents the demographic features of the individual most likely to benefit from a bankruptcy discharge, that is, the Ideal Debtor, contrasts those characteristics with the demographics of potential minority debtors, and concludes that the Ideal Debtor is likely to be white. Part III argues that, given the Code's existing bias in favor of white debtors, Congress should refrain from enacting any legislative proposal that exacerbates the disparity between the type of relief a typical minority debtor and the Ideal (white) Debtor likely receives in bankruptcy, that is, the "benefits gap." This Part concludes by urging Congress to revise the Code to remove racially-biased provisions (like those that favor individuals with wealth and favor homeowners over renters) and urges courts to interpret vague terms in the Code in a pluralistic fashion that helps close (not widen) the benefits gap.II. Bankruptcy ReliefA. GoalsBankruptcy proceedings are designed to give poor but honest debtors a fresh financial start and to ensure that creditors are treated fairly in an orderly debt resolution proceeding.4 Financially-strapped people who seek bankruptcy relief have two main options and, unless there are allegations of fraud or abuse, can largely choose which option they prefer. The quicker and simpler option is a Chapter 7 liquidation.5 Chapter 7 debtors discharge most debts but relinquish all assets except property they are allowed to exempt (that is, keep) from creditors.6 The second option, available for individuals with stable and regular income, is to restructure and then attempt to repay at least some debts over a three to five year period in a Chapter 13 debt adjustment proceeding.7 Because Chapter 13 debtors repay their debts from future income, they are not required to liquidate their assets. For this reason, debtors typically choose Chapter 13 over Chapter 7 in order to keep homes, cars, and other nonexempt assets.8Chapter 13 debtors are not, however, required to repay all their debts. Instead, they must devote all their "disposable income" to making payments pursuant to their Chapter 13 plan.9 Disposable income is defined as the debtor's income that is not "reasonably necessary" to pay for maintenance or support of the debtor or his dependents. …