Racial Disparities and Bias in Consumer Bankruptcy

We document substantial racial disparities in consumer bankruptcy outcomes and investigate the role of racial bias in contributing to these disparities. Using data on the near universe of US bankruptcy cases and self-reported and manually-identified measures of race, we show that minority filers are unconditionally 12.7 and 2.3 percentage points more likely to have their bankruptcy cases dismissed without debt relief in Chapters 13 and 7, respectively. We uncover strong evidence of racial homophily: in Chapter 13, where trustees have more discretion, minority filers are 2.3 percentage points more likely to be dismissed when randomly assigned to a White bankruptcy trustee than to a minority trustee. Black and Hispanic Chapter 13 filers are the most negatively affected by homophily. To interpret our findings, we develop a general decision model and new identification results relating homophily to bias. Our homophily approach is particularly useful in settings where traditional outcome tests for bias are not feasible because the decision-maker's objective is not well defined or decision-relevant outcomes or risk factors are unobserved. Applying this framework to our homophily estimate implies that at least 15% of the unconditional Chapter 13 dismissal gap and 53% of the conditional dismissal gap for minority filers is due to either taste-based or inaccurate statistical discrimination.