How bankruptcy bias contributes to the racial wealth gap

The wealth gap between Black people and white people is widening, and a new study from Wharton shows how racism plays a key role in keeping minorities from reaching financial equality.

Concerned person standing by a window looking at a sheet of paper.

Wharton finance professor Sasha Indarte is part of a team of researchers looking at bias in bankruptcy, which is a significant source of debt relief for Americans. In their study, Indarte and her co-authors found that Black bankruptcy filers are far more likely than whites to have Chapter 7 and Chapter 13 cases dismissed by the court.

“When a case is dismissed, this means someone goes through all the hassle of trying to file for bankruptcy, but they don’t actually get the debt relief by the end of the process,” Indarte says. “When we see that Black filers are much more likely to get their cases dismissed, that means they’re getting access to debt relief at a much lower rate.”

The findings matter because they indicate how bias informs decision-making in bankruptcy proceedings, and they add to the scant body of research on the topic. A previous study examined how attorneys appear to be steering more Black filers toward Chapter 13, which is a costlier form of bankruptcy than Chapter 7 and already has higher baseline dismissal rates.

“We can’t say if this is, for example, racial animus versus a more subtle form of implicit bias,” says Indarte. “But what this is suggesting is that if you take a person and the only thing that you change about them is their race, on average they would see a different outcome in the bankruptcy process.”

Read more at Knowledge@Wharton.