The Homeownership Experience of Households in Bankruptcy

Sarah W. Carroll, University of Pennsylvania
Wenli Li, Federal Reserve Bank of Philadelphia

The views expressed in this article do not necessarily represent those of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.

This article provides the first indepth analysis of the homeownership experience of homeowners in bankruptcy. These homeowners are typically seriously delinquent on their mortgages at the time of filing. We measure how often they end up losing their houses in foreclosure, the time between bankruptcy filing and foreclosure sale, and the loss rate for lenders. In particular, we follow homeowners who filed for chapter 13 bankruptcy (Chapter 13, Individual Debt Adjustment, Bankruptcy Code) between 2001 and 2002 in New Castle County, Delaware, from the time of their filing to October 2007. We present three main findings. First, about 27.9 percent of filers lost their houses in foreclosure despite filing for bankruptcy. Second, when compared with debtors who did not file, bankrupt debtors remained in their houses for, on average, 27.7 additional months. Third, most of the lenders suffered losses and the average loss rate was 28.0 percent. Our empirical analysis further suggests that under the assumption that filers’ profiles are similar to those in our model, reducing homeowners’ mortgage payment burdens (that is, instituting mortgage “cramdowns”) will reduce the number of houses that end up in foreclosure. The reduction, however, is likely to be modest.