An estimated five to ten million United States homeowners will fall victim to the 2007-2011 subprime foreclosure crisis. In addition to owing more than their homes are worth, in many cases consumers face monthly payments on other debts that exceed 75 percent of their income. Efforts to adapt the Bankruptcy Code to the current crisis have been unavailing. Nevertheless, U.S. bankruptcy law offers some tools that could help distressed borrowers, including relief from other debts and the discharge of wholly unsecured junior mortgage loans.

This empirical study examines the extent to which delinquent mortgage borrowers have filed for bankruptcy during the crisis, and how homeowners using the bankruptcy system have fared when compared to homeowners not filing for relief and/or homeowners who have received a loan modification. For this analysis, we use a large mortgage industry loan-level performance dataset managed by Corporate Trust Services (CTS) of Wells Fargo Bank, N.A., also known as the Columbia Collateral File. The CTS data cover privately securitized mortgages, and our sample includes over 3 million individual loans originated between 2000 and 2007. Using a competing risks regression model, we identify factors associated with bankruptcy filings by mortgage borrowers, and then attempt to measure the effect of filing for bankruptcy on loan outcomes. Initial results suggest that bankruptcy filings do not reduce eventual home loss, particularly compared with non-bankruptcy modifications.  Interestingly, however, homeowners’ decision to file for bankruptcy, and whether they fare better as a result, varies strikingly by state.  One of the key contributions of this paper is an exploration of the factors that account for this variation, including state foreclosure laws and local bankruptcy culture and trends.