Georgia bankruptcy filings reveal economic, racial differences

Georgia bankruptcy filings reveal economic, racial differences

AJC analysis shows rare look at who files, what debts they have and how much they owe.

Over the last year, The Atlanta Journal-Constitution has collected data from several thousand bankruptcies in Georgia as part of an effort to understand the economic impact of COVID-19 on Georgians.

The legal mechanism of last resort, bankruptcy is the plea for help at the end of a grueling road littered with collection calls, deferred medical treatment and repossessions. A debtor, resigned to the unattainable sum of their debts, asks the court to dismiss much of what they owe. They ask for a second chance at financial life.

This is why Robert Lawless, professor of law at Illinois University, calls bankruptcy “The Law of the Second Chance and the Law of the Broken Promise.” His research, based on Consumer Bankruptcy Project survey data, estimates that two thirds of people who eventually file for bankruptcy struggled financially for at least two years before filing. Half of those strugglers sold cars, furniture, and other items to pay their debts. Sixty percent went without medical care of any kind.

This is the second chance of bankruptcy. Wages that were garnished or immediately handed off to pay debts can be used after bankruptcy for health care or food or electricity.

But bankruptcy can also represent a promise broken for some filers. Young Americans hope that a college education can be a pathway to a living wage and the middle class. But our analysis revealed that hope failed to deliver for poor Georgians who took on student loan debt. One in 10 filers with student loan debt were below the poverty line, owing an average of $10,000, according to the data.

In all, the 2,000 bankrupt Georgians in our analysis owed nearly $220 million scattered over 40,000-plus debts.

Bankruptcies are a lagging economic indicator and stalled during the pandemic. But they are expected to pick back up as the fallout the pandemic washes through the economy. The AJC plans to dig deeper into them in 2021 to inform readers about the financial and human costs of this seismic jolt to our economy.

Read the highlights of our latest findings below and then use our data explorer at the bottom to learn for yourself what role different debts played in the bankruptcies of different demographic groups. The AJC analyzed differences among white and Black filers, and among poorer and wealthier filers to show the different debts the groups owed. The data revealed some similarities, but also statistical differences among racial groups and income levels.

Student loan debt

In general, filers in majority Black census tracts and filers in majority white census tracts were more alike than they were different in the kinds of debts they owed.

Less than 5% separated the percentage of total debt filers in majority Black and majority white areas owed to different kinds of creditors, such as collection companies, mortgage companies and tax collectors.

But Black and white filers were different in important ways.

Filers in predominately Black neighborhoods owed significantly more student loan debt than those in predominantly white neighborhoods. While filers in mostly white areas owed about 8% of their total debt as student loan debt, filers in mostly Black areas owed 14% — nearly double.

Lawless attributed this difference to the predatory practices of some for-profit colleges. Our data does not include the profit status of the universities attended by bankruptcy filers.

But other data supports Lawless’ claim. According to the Aspen Institute, for-profit colleges account for 45% of the higher education system. Black and brown students are more than three times as likely to attend for-profit colleges, and a majority of students at those colleges are students of color.

Likewise, other researchers have found that almost 60% of Black students who attended for-profit colleges in 2004 had defaulted by 2016.

For all filers, student loan debt was the second highest category of debt, about $26 million owed, according to our data.

Mortgage debt

While filers owe all sorts of debts, there’s really only one big-money debt: mortgages. Our 2,000 bankrupt filers owed about $64 million in mortgages.

Filers living in majority white neighborhoods owed the bulk of that value, $36 million dollars. While the homes in majority white neighborhoods were about $20,000 more expensive on average, the higher mortgage debt owed in these neighborhoods is mostly caused by the larger number of white bankruptcy filers overall.

While average size of mortgage debt in white and Black neighborhoods was similar, the quality of those mortgages was not. In our data, one third of filers in mostly Black neighborhoods owed more on their homes than the home was worth. Just 21% of filers in mostly white neighborhoods faced the same situation.

These “underwater mortgages,” as they’re known, turn what should be a person’s most valuable asset into just another debt. If, for example, the owner of an underwater home sells their house, they receive none of that money, and must pay the difference to the bank.

Some academics attribute this to depreciating home values in Black neighborhoods. But in Georgia, that isn’t the case. By comparing the neighborhoods of our bankruptcy filers with mortgage information from those same neighborhoods, we found that it was the initial mortgage that caused the problem.

From the very beginning, the average mortgage in a Black neighborhood was worth 89.2% of the home’s value, while the average mortgage in a white neighborhood was worth just 85.8% of the home’s value. Likewise, interest rates in majority Black neighborhoods were, on average, 33 basis points (or .33%) greater than those in majority white neighborhoods. In concrete terms, the cost of a 30-year mortgage on a $300,000 home for a Black filer would be $526,614, as compared to $487,858 for a white filer.

Good debt, bad debt

While Black and white filers had more in common than not, filers at different parts of the income distribution were a different story. From medical debt, auto debt, mortgage debt, and student loans, wealthier filers owe “better” debt than the less wealthy.

Filers making less than $35,000 a year owed nearly double the medical debt compared with above-average-income filers. Below-average-income filers owed nearly triple the auto debt of wealthier filers. Neither medical debt nor auto debt is an appreciating asset.

Mary Hansen, professor of economics at American University, said “that’s the kind of credit (poorer people) can get.”

On the other hand, wealthier filers owed nearly quadruple the mortgage debt of poorer filers. While mortgages have their problems, homes generally appreciate in value, as opposed to medical loans and cars.

Race and class

Neither race or class fully captures the discrepancies in Georgia’s debts.

Even though filers living in majority Black areas, on the whole, owed more depreciating auto debt than those in white areas, wealthier filers in these areas owed less auto debt than poorer filers in mostly white neighborhoods; about 5% in Black areas and 9% in white areas.

Wealthier filers in mostly Black neighborhoods also owed about the same student loan debt as poorer filers in mostly white neighborhoods, while poorer filers in white areas owed 50% less on student loans than poorer filers in Black areas.

A statistical analysis accounting for both race and class, as well as other considerations, showed that:

  • Black filers hold 25% more student loans than white filers
  • Poorer filers hold 15% more medical debt
  • Black filers hold 11% more debt in collections

The policy picture

In December 2020, Sen. Elizabeth Warren, D-Mass., introduced a bankruptcy reform bill intended to address inequities facing debtors. Her bill would make student loan debt dischargeable in bankruptcy, which is, effectively, not currently permitted.

It would allow low-asset, low-income bankruptcy filers to discharge nearly all their unsecured debts without paying filings fees, which currently presents a financial obstacle to a disproportionate amount of Black filers and all poor filers.

The law also makes mortgage modification possible during bankruptcy, something that is already the case for many other kinds of debts. Given that a significantly larger percentage of Black filers’ homes were underwater because of their mortgage terms, this provision could help level the playing field for Black filers.

“Consumer bankruptcy itself cannot solve the racial disparities...that plague African Americans,” wrote Lawless, who supports Warren’s plan. But it can “address racial disparities within the consumer bankruptcy process.”

Explore the interactive

Use this interactive to explore the data and reach out to Nick Thieme with what you see. The more comparisons you make, the more likely you are to find something just by chance.

Source: Bankruptcy documents were downloaded through Pacermonitor and converted to data by the AJC.

About the story

With special nonprofit funding, the AJC is reporting the financial impact of the coronavirus pandemic in Georgia through federal bankruptcy filings and other data. Among the most complete record of financial hardship, bankruptcy filings will help AJC journalists quantify and explain the pandemic’s toll on Georgia’s residents and businesses over the next year. Since data on race is not collected by bankruptcy courts, the AJC matched the addresses of filers to census data on the racial makeup of their neighborhood in this story.

This story was produced with support and funding from the Pulitzer Center in Washington, D.C. and the Brown Institute for Media Innovation at Columbia Journalism School. PacerMonitor provided PACER federal court data through its API.