Bankruptcy During Foreclosure: Home Preservation Through Chapters 7 and 13

Abstract

Filing for bankruptcy is the primary legal mechanism by which homeowners in foreclosure can exert control over ownership of their home, yet little is known about the interplay among bankruptcy types, mortgage servicers, state foreclosure laws, and home foreclosure auctions. We analyze 4,280 lower-income homeowners in the United States who were more than 90 days late paying their 30-year fixed-rate mortgages. Two dozen organizations serviced these mortgages and initiated foreclosure between 2003 and 2012. We identify wide variation between mortgage servicers in their likelihood of bringing a property to auction. We also show that when homeowners in foreclosure filed for bankruptcy, foreclosure auctions were 70% less likely. Chapters 7 and 13 filings both reduce the hazard of auction, but the effect is 5 times greater for Chapter 13, which contains enhanced tools to preserve homeownership. Bankruptcy's effects are strongest in states that permit power-of-sale foreclosure or withdraw homeowners' right-of-redemption at the time of auction.

Keywords::

• mortgage servicing
• displacement
• relocation
• real estate owned
• homeownership
• default

Note

Funding for this study was provided by the Ford Foundation. Geolytics, Inc. supplied Census data.

Additional information

Notes on contributors

Mark R. Lindblad

Mark R. Lindblad is the research director at the Center for Community Capital at the University of North Carolina at Chapel Hill. He conducts research on financial default, housing, homeownership, and community economic development.

Roberto G. Quercia

Roberto G. Quercia is the director of the Center for Community Capital at the University of North Carolina at Chapel Hill and a professor in and the chair of the Department of City and Regional Planning. Quercia conducts research on low-income homeownership, mortgage lending, and financial services.

Melissa B. Jacoby

Melissa B. Jacoby is the Graham Kenan Professor at the University of North Carolina at Chapel Hill, where she studies and teaches bankruptcy and commercial law. She is an elected member of the American Law Institute and the National Bankruptcy Conference, and a Fellow of the American College of Bankruptcy.

Ling Wang

Ling Wang is a doctoral candidate in the Department of Statistics, and a research assistant at the Center for Community Capital, at the University of North Carolina at Chapel Hill, where she also completed her master's in economics with a concentration on health.

Huifang Zhao

Huifang Zhao is a master's candidate in the Department of Statistics, and a research assistant at the Center for Community Capital, at the University of North Carolina at Chapel Hill.