Panel Paper: Bankruptcy Decisions of Homeowners In Foreclosure

Saturday, November 10, 2012 : 10:15 AM
Salon B (Radisson Plaza Lord Baltimore Hotel)

*Names in bold indicate Presenter

Mark Lindblad and Melissa Jacoby, University of North Carolina, Chapel Hill

In light of the housing downturn and ongoing foreclosure crisis, we examine whether filing for personal bankruptcy protects homeowners from a foreclosure sale of their home.  Chapter 13 bankruptcy provides a formal mechanism to keep borrowers in their home while Chapter 7 eliminates unsecured debts and may help borrowers make their mortgage payments.  We analyze a sample of 424 lower income homeowners who were seriously delinquent on their mortgages and whose lenders initiated foreclosure proceedings in the last decade.  We measure the time between the start of foreclosure proceedings and eventual foreclosure sale or censoring through 2011.  Of the 424 homeowners in foreclosure, 91 (21%) filed for personal bankruptcy and 163 (38%) eventually lost their home to foreclosure sale.  We present two-stage models which first estimate the bankruptcy decision and then predict foreclosure duration and sale.  We control for mortgage origination features, loan servicing, and state foreclosure laws as well as life events, the financial benefit of filing, and local bankruptcy filing rates.  In our first model, we find that bankruptcy is negatively associated with foreclosure sales, but the effect is not significant.  We then model whether bankruptcy influences foreclosure duration, and we find that filing for bankruptcy increased the time to foreclosure sale by 30 months.  We analyze both foreclosure models by Chapter 7 and 13 filings, and we discuss implications for policy and practice.