Mark R. Lindblad
UNC Center for Community Capital
Roberto Quercia
University of North Carolina (UNC) at Chapel Hill – Department of City and Regional Planning
Melissa B. Jacoby
University of North Carolina (UNC) at Chapel Hill
– School of Law
Ling Wang
University of North Carolina (UNC) at Chapel Hill
Huifang Zhao
University of North Carolina (UNC) at Chapel Hill
October 23, 2013
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 between bankruptcy chapters, 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 the property to auction. We also show that when homeowners in foreclosure filed for bankruptcy, foreclosure auctions were 70% less likely. Chapters 7 and 13 both reduce the hazard of auction, but the effect is five 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.
The wealthier you are, the better Bankruptcy becomes. If you have your one and only home, you can save it, but you cannot get cram down. If you have a vacation or second home, the code is there to help you with cram down. This is an oversimplification of course, but Bankruptcy often times offers former homeowners delays, or “fresh starts” but a debt that cannot be repaid certainly won’t be, especially if it becomes larger! Depending on the state, creditors usually rule.
(Special thanks to Orin Hatch, Joe Biden, and many others that legislated to make the process decidedly brutal as opposed to helpful!)