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Is there systemic racism and gender bias in the Bankruptcy system?

Posted by Diem Hallaq | Dec 30, 2020 | 0 Comments

Recently, Senators Elizabeth Warren (D-Mass) and Representative Jerry Nadler (D-NY) proposed a major overhaul to the Bankruptcy system that they called the Consumer Bankruptcy Reform Act of 2020. While it does not have much chance of passing this year, it is quite possible that it would pass next year, and it proposes (among other things) to create a new Bankruptcy Chapter 10 (which would either consolidate or replace the current Ch. 7 and Ch. 13 systems). Under this new system, according to the Wall Street Journal and CBS News reporting, student loans would be treated similar to other unsecured debts such as credit cards, and medical bills.
According to Elizabeth Warren's web site ( this action would “[h]elp address shameful racial and gender disparities that plague our bankruptcy system.”
I have been involved in the Bankruptcy world since 1998, and in over twenty years of Bankruptcy practice I have worked with thousands of clients. The question of whether the system has racial or gender bias is an interesting one.
Certainly there is a class bias. The so-called “means-test” in Chapter 7 is a great example of this. In this process, if your income exceeds the median household income in the area in which you live, and there are no other exceptions that you can apply, you would not qualify for Ch. 7 Bankruptcy relief. There are some areas where a person is not subject to the means test, and while some of them are very laudable (such as a disabled veteran), the glaring exception is for people whose debt was primarily procured through business related activities.
Why is this important?
Because wealthy people do not work for pay checks. In the vast majority of cases, wealthy people own their own businesses and their debt is primarily related to those business practices. So a doctor with a clinic who overextended himself on his new office remodel is not subject to the means test, but a truck driver or union worker would be subject to the means test. This was clearly a political gift to special interests when the Bankruptcy Abuse Prevention and Consumer Act of 2005 was passed, and it hurt working class Americans.
In my own practice, I have seen some egregious examples of racism, especially among creditors. I had one client who was an African-American single mother who moved into a largely retired condominium community and the other residents immediately began to harass her to encourage her to leave. It got to the point where she was sent a notice that if she did not paint the trim on the outside of her condo during a severe snow storm, she was going to get fined by the Condo Association. The most pronounced bias that I have seen is with respect to predatory lending, where some companies target people in poor communities with loans that have outrageous interest rates and terms.
But the question remains…is there racial or gender bias in the Bankruptcy system itself? I was just on the phone with a very experienced local area Bankruptcy attorney who emphatically stated that such bias exists. Without a doubt there are inequalities of outcome.
For example, some people who are poor desire a waiver of their court filing fee (which in this area is $338 for a Ch. 7), but they also do not feel comfortable with proceeding with a complex Bankruptcy process without the assistance of an attorney. If I charge that client for my services, in most cases the court will deny that client the ability to waive the court filing fee, but if they filed without an attorney (and all other aspects remain the same) their court filing fee would get waived. Of course, because many urban poor are minorities, this situation has a disproportionate impact on minorities.
In other instances, it is not uncommon for a woman to agree to receive less child support or spousal support in exchange for her husband taking on the marital debt in a divorce. Once the divorce is final, the husband then files for Bankruptcy relief and eliminates his obligations, and sadly those creditors now go after the ex-wife, despite what the divorce decree says.
There are many examples like this where the Bankruptcy system does not seem to have the ability to react and alter disparate outcomes. Many Bankruptcy practitioners, like me, who were around in the days when cram downs were much easier, ride-throughs were more common, and the power of the Bankruptcy Judge was more available to stop bad outcomes, lament the changes from 2005. Maybe the new changes will restore some fairness to the situation.
The question of whether the system itself is geared towards racial and gender bias is more complex. I have a tremendous amount of respect for the Bankruptcy Judges and Bankruptcy Trustees and I truly believe that most try very hard to reach fair results and that I have not encountered (in my jurisdiction) clear examples of systemic racial and gender bias. Having said that, there is no doubt that there are many aspects of the system that function to punish the working poor, and for anyone in that category who gets caught up in an unfair set of circumstances, it would be hard to argue the fact that the system can seem unfair, and anyone in that situation would be forgiven for believing that the system is replete with racial and gender bias.

About the Author

Diem Hallaq

My law partner who is also my husband and I serve our clients with the utmost professionalism and a humble heart. I have worked in the areas of personal injury, Bankruptcy, and criminal law for medium sized firms and a large nationwide law firm.  Of all the different types of legal clients that I have served in over fifteen years as a practicing attorney, I enjoy helping Bankruptcy clients the most, because I can provide them with an immediate and positive change to their lives.  When I am not working as an attorney, I have enjoyed working for our local food bank and women's shelter.  In my time off, I enjoy Pilates and paddle boarding!


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