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Identifying the Racial Disparities in Debt Collection

A wealth gap between the typical black and the typical white household is the likely reason why the number of judgments in neighborhoods with the majority of individuals are black is significantly higher than the number of judgments in neighborhoods with the majority of individuals are not black, according to a study released last month by two economics professors from the University of Pittsburgh.

Controlling for differences in median incomes, median credit scores, and default rates, the judgment rate for black neighborhoods is 40% higher than the judgment rate for non-black neighborhoods, according to the study.

“It is more likely that the unexplained racial gap in debt collection judgments are the result of the broader disadvantages experienced by minority communities that have persisted into our modern day society,” the researchers wrote. “For example, according to estimates provided by the United States Census Bureau in 2016, the typical black household has a net worth of $12,920, while that of a typical white household is $114,700 – this is a $101,780 difference in wealth that could have important implications for a household’s ability to mitigate negative financial shocks. About $35,000 of this wealth gap is not driven by home equity. By translating this wealth gap into differences in annual income and using our estimates of the relationship between income and judgements, we calculate that a wealth gap of this size would explain almost all of the remaining judgment gap across black and non-black communities.”

Identifying the extent to which racial disparities exist and how they are entering the debt collection system is “crucial” to helping develop policies related to consumer protection and how they impact individuals of different races, the report concludes.

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