Racial Dimensions of Credit and Bankruptcy

Washington and Lee Law Review, Fall 2004 by Skeel, David A Jr

What makes Sadie's apparent absence from the bankruptcy wing of the federal district court so puzzling is that bankruptcy was an outsider practice throughout the middle decades of the twentieth century. Bankruptcy was viewed as an ethnic, urban practice, with the busiest bankruptcy dockets located in New York, Philadelphia, Boston, and other major cities.26 Particularly in the Northeast, many of the leading members of the bankruptcy bar were Jewish attorneys who had been shut out of the larger big-city law firms that largely or entirely excluded Jews.27 Bankruptcy lawyers also came from other ethnicities that were not well-represented in the higher reaches of the bar, such as the Italian and Irish communities. In this environment, one might have expected to find Sadie or Ray Alexander regularly representing black clients in bankruptcy cases. But there is little evidence that they, or other black Philadelphia lawyers for that matter, figured prominently in the bankruptcy courts.

B. Explaining the Absence of Bankruptcy

Why did the Alexanders' thriving, wide-ranging general practice seem to omit bankruptcy? The discussion that follows will consider four plausible answers to this question-four interdependent explanations that together may shed some light on both the black bar and American credit markets in the middle decades of the twentieth century. The first and most obvious is that blacks did not have nearly the same access to credit that whites did. In the mid-twentieth century, mainstream banks routinely and often explicitly red-lined black neighborhoods, which cut off a major source of home mortgage financing.28 Black businessmen were likely to face similar obstacles if they sought a business loan from a mainstream bank.29 As we will see, discrimination by mainstream banks did not eliminate access to bank credit altogether.30 But overall, a black homeowner or entrepreneur did not have nearly the same access to conventional credit as white Philadelphians did.

There is a simple but often overlooked connection between the obstacles to obtaining credit and the dearth of bankruptcy cases in the Alexanders' files: Individuals and businesses that do not have access to credit do not file for bankruptcy. In this sense, bankruptcy has always been, oddly enough, a marker of middle class status. The fact that credit is a prerequisite to bankruptcy and that blacks had significantly constrained access to credit may partly explain why we do not find active practice of bankruptcy by black lawyers in the mid-twentieth century.

Blacks' inability to obtain credit cannot be the entire explanation, however, because, as discussed below, black Philadelphians were not cut off from credit altogether. This observation leads directly to the second possible explanation. When conventional sources of credit are foreclosed, whether for legitimate reasons or more pernicious ones, many borrowers turn to alternative forms of credit such as pawnshops and check-cashing outlets.31 That pawnshops were a significant source of credit in the black community even in the late nineteenth century is evident from a fleeting reference in The Philadelphia Negro,32 and their prominence in underserved communities continued throughout the twentieth century.33 Check-cashing outlets date back to the 1930s, a decade or two after businesses began to routinely pay their employees by personal check.34 In the middle decades of the twentieth century, pawnshops and check-cashing outlets were an important source of credit for many black borrowers.35