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Saving Your Home in Chapter 13 Bankruptcy

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  • Michelle J. White
  • Ning Zhu
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    Abstract

    This paper examines how filing for bankruptcy under Chapter 13 helps financially distressed debtors save their homes. We develop a model of debtors’ decisions to default on their mortgages and file for bankruptcy under Chapter 13 and evaluate the model using new data on Chapter 13 bankruptcy filers. We also examine the effect of allowing bankruptcy judges to reduce debtors’ mortgage payments, i.e., introducing “cram-down” of mortgages in Chapter 13. We find that 96% of Chapter 13 filers are homeowners and 79% of filers repay mortgage debt in their repayment plans; while just 9% of filers repay only unsecured debt in their plans. These results suggest that filers use Chapter 13 almost exclusively as a “save-your-home” procedure. But under current law, only about 1% Chapter 13 filers save their homes when they would otherwise have defaulted. If cram-down were introduced, we predict that this fraction would increase to 10%. The cost to lenders of introducing cram-down is estimated to be $264,000 per home saved and $30 billion in total.

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    File URL: http://www.nber.org/papers/w14179.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14179.

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    Date of creation: Jul 2008
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    Publication status: published as "Saving Your Home in Chapter 13 Bankruptcy," with Ning Zhu. NBER working paper 14179. Journal of Legal Studies, vol. 39:1, pp. 33-61, January 2010
    Handle: RePEc:nbr:nberwo:14179

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Hülya Eraslan & Wenli Li & Pierre-Daniel G. Sarte, 2007. "The anatomy of U.S. personal bankruptcy under Chapter 13," Working Paper 07-05, Federal Reserve Bank of Richmond.
    2. Sarah W. Carroll & Wenli Li, 2008. "The homeownership experience of households in bankruptcy," Working Papers 08-14, Federal Reserve Bank of Philadelphia.
    3. White, Michelle J, 1998. "Why Don't More Households File for Bankruptcy?," Journal of Law, Economics and Organization, Oxford University Press, vol. 14(2), pages 205-31, October.
    4. Berkowitz, Jeremy & Hynes, Richard, 1999. "Bankruptcy Exemptions and the Market for Mortgage Loans," Journal of Law and Economics, University of Chicago Press, vol. 42(2), pages 809-30, October.
    5. Scott Fay & Erik Hurst & Michelle J. White, 2002. "The Household Bankruptcy Decision," American Economic Review, American Economic Association, vol. 92(3), pages 706-718, June.
    6. White, M.J., 1998. "Why Don't More Households File for Bankruptcy?," Papers 98-03, Michigan - Center for Research on Economic & Social Theory.
    7. Adam B. Ashcraft & Astrid A. Dick & Donald P. Morgan, 2007. "The Bankruptcy Abuse Prevention and Consumer Protection Act: means-testing or mean spirited?," Staff Reports 279, Federal Reserve Bank of New York.
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    Cited by:
    1. Michelle J. White, 2008. "Bankruptcy: Past Puzzles, Recent Reforms, and the Mortgage Crisis," NBER Working Papers 14549, National Bureau of Economic Research, Inc.
    2. Donald P. Morgan & Benjamin Iverson & Matthew Botsch, 2012. "Subprime foreclosures and the 2005 bankruptcy reform," Economic Policy Review, Federal Reserve Bank of New York, issue Mar, pages 47-57.
    3. Song Han & Geng Li, 2011. "Household Borrowing after Personal Bankruptcy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 491-517, 03.
    4. Casey B. Mulligan, 2009. "Means-Tested Mortgage Modification: Homes Saved or Income Destroyed?," NBER Working Papers 15281, National Bureau of Economic Research, Inc.

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