Racial Disparities in Debt Collection

TL;DR

This study reveals significant racial disparities in debt collection judgments, with black and Hispanic borrowers facing higher likelihoods, influenced by local economic factors, but not by state-level discrimination or legal representation.

Contribution

It provides new evidence on racial disparities in debt collection and explores the economic and geographic factors influencing these differences.

Findings

Black and Hispanic borrowers are 39% more likely to face judgments.

Disparities are greater in areas with payday lenders and low education levels.

Closing the racial wealth gap could reduce judgment disparities.

Abstract

This paper shows that black and Hispanic borrowers are 39% more likely to experience a debt collection judgment than white borrowers, even after controlling for credit scores and other relevant credit attributes. The racial gap in judgments is more pronounced in areas with a high density of payday lenders, a high share of income-less households, and low levels of tertiary education. State-level measures of racial discrimination cannot explain the judgment gap, nor can neighborhood-level differences in the previous share of contested judgments or cases with attorney representation. A back-of-the-envelope calculation suggests that closing the racial wealth gap could significantly reduce the racial disparity in debt collection judgments.