Bankruptcy is a legal process designed to give individuals or businesses overwhelmed by debt a chance to reset their finances. For individuals, the two most common types are Chapter 7 and Chapter 13 bankruptcy.

What Are Chapter 7 and Chapter 13?

• Chapter 7 is often called “liquidation bankruptcy.” It typically wipes out unsecured debt—like credit cards and medical bills—in about 3 to 6 months, giving filers a clean slate. You may need to give up non-exempt property, but in most cases, people keep their home and car.

• Chapter 13 is a repayment plan over 3 to 5 years. It’s used by filers with steady income who want to keep their assets and catch up on payments like mortgages or car loans. Unlike Chapter 7, it’s more expensive, takes longer, and carries a higher risk of failure—many filers don’t complete the plan.

Bankruptcy is meant to provide a fresh start, not a punishment. It halts collections, stops lawsuits, and allows people to rebuild their financial lives. But in practice, that promise isn’t distributed equally.

The Racial Gap in Bankruptcy

Research shows Black filers are disproportionately steered into Chapter 13, even when Chapter 7 would be faster, cheaper, and more effective. In one study:

• Over 54% of Black filers were placed in Chapter 13

• Just 28% of white filers used Chapter 13

• In majority-white ZIP codes, 72% of bankruptcies were Chapter 7

• In majority-Black ZIP codes, only 49% were

Why? One major reason is attorney fee structures. Chapter 7 requires fees up front; Chapter 13 allows attorneys to collect through the repayment plan. Some attorneys push Chapter 13 to get paid more easily—regardless of the client’s best interest.

Implicit bias also plays a role. Studies using racially coded names found attorneys were more likely to recommend Chapter 13 to Black-sounding names, even when financial details were identical.

The outcome? Chapter 13 cases for Black filers are more likely to fail, meaning no debt relief and wasted time and money.

What About Student Loans and Tax Debt?

A common myth is that student loan and IRS debt can never be discharged. That’s not true.

• Student Loans: While it’s harder, they can be discharged if repaying them causes “undue hardship.” That standard is changing—recent Department of Education guidance makes it easier for borrowers to succeed, especially in bankruptcy courts that use a streamlined attestation process.

• IRS Debt: Older tax debt can be discharged if it meets certain criteria (e.g., the tax return was due at least three years ago, filed at least two years ago, and assessed over 240 days ago).

Final Thoughts

Bankruptcy can be a powerful tool for reclaiming your financial stability. But like many aspects of American life, access to its benefits isn’t always equitable. If you’re considering bankruptcy, it’s essential to understand your options, question your attorney’s recommendations, and know that relief is possible—even for student loan or tax debt.

We’re building Pythia®, a predictive analytics tool for financial planning. While development has been exciting, working solo makes it difficult to avoid scope creep—adding features and complexity beyond what’s necessary for a minimum viable product (MVP). Still, we’re committed to launching with a core experience that empowers users to make clearer financial decisions…

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Disclaimer: This article is for informational purposes only and is not legal, financial, or professional advice.