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Saving Your Home in Chapter 13 Bankruptcy

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  • Michelle J. White
  • Ning Zhu

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.

Suggested Citation

  • Michelle J. White & Ning Zhu, 2008. "Saving Your Home in Chapter 13 Bankruptcy," NBER Working Papers 14179, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:14179
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    References listed on IDEAS

    as
    1. Hülya Eraslan & Wenli Li & Pierre-Daniel G. Sarte, 2007. "The anatomy of U.S. personal bankruptcy under Chapter 13," Working Papers 07-31, Federal Reserve Bank of Philadelphia.
    2. Foote, Christopher L. & Gerardi, Kristopher & Willen, Paul S., 2008. "Negative equity and foreclosure: Theory and evidence," Journal of Urban Economics, Elsevier, vol. 64(2), pages 234-245, September.
    3. Sarah W. Carroll & Wenli Li, 2008. "The homeownership experience of households in bankruptcy," Working Papers 08-14, Federal Reserve Bank of Philadelphia.
    4. 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.
    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. Quigley, John M & Van Order, Robert, 1995. "Explicit Tests of Contingent Claims Models of Mortgage Default," The Journal of Real Estate Finance and Economics, Springer, vol. 11(2), pages 99-117, September.
    7. 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 809-830, October.
    8. White, M.J., 1998. "Why Don't More Households File for Bankruptcy?," Papers 98-03, Michigan - Center for Research on Economic & Social Theory.
    9. 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 205-231, October.
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    Citations

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    Cited by:

    1. Song Han & Geng Li, 2011. "Household Borrowing after Personal Bankruptcy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 491-517, March.
    2. Fraisse, Henri, 2017. "Households Debt Restructuring: The Re-default Effect of a Debt Suspension," IZA Discussion Papers 11032, Institute for the Study of Labor (IZA).
    3. Cornwell, Christopher & Xu, Bing, 2014. "Effects of the BAPCPA on the chapter composition of consumer bankruptcies," Economics Letters, Elsevier, vol. 124(3), pages 439-442.
    4. Wenli Li & Michelle J. White & Ning Zhu, 2011. "Did Bankruptcy Reform Cause Mortgage Defaults to Rise?," American Economic Journal: Economic Policy, American Economic Association, vol. 3(4), pages 123-147, November.
    5. Hülya Eraslan & Gizem Koşar & Wenli Li & Pierre‐Daniel Sarte, 2017. "An Anatomy Of U.S. Personal Bankruptcy Under Chapter 13," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58, pages 671-702, August.
    6. Wenli Li & Ishani Tewari & Michelle J. White, 2014. "Using Bankruptcy to Reduce Foreclosures: Does Strip-down of Mortgages Affect the Supply of Mortgage Credit?," NBER Working Papers 19952, National Bureau of Economic Research, Inc.
    7. Michelle White & Wenli Li, 2011. "Residential Mortgage Default and Consumer Bankruptcy: Theory and Empirical Evidence," 2011 Meeting Papers 1038, Society for Economic Dynamics.
    8. repec:tpr:restat:v:99:y:2017:i:5:p:853-869 is not listed on IDEAS
    9. Will Dobbie & Paul Goldsmith-Pinkham & Crystal S. Yang, 2017. "Consumer Bankruptcy and Financial Health," The Review of Economics and Statistics, MIT Press, vol. 99(5), pages 853-869, December.
    10. Casey B. Mulligan, 2009. "Means-Tested Mortgage Modification: Homes Saved or Income Destroyed?," NBER Working Papers 15281, National Bureau of Economic Research, Inc.
    11. 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.
    12. Eric Helland & Anupam B. Jena & Dan P. Ly & Seth A. Seabury, 2016. "Self-insuring against Liability Risk: Evidence from Physician Home Values in States with Unlimited Homestead Exemptions," NBER Working Papers 22031, National Bureau of Economic Research, Inc.
    13. repec:eee:empfin:v:42:y:2017:i:c:p:256-282 is not listed on IDEAS
    14. H. Fraisse, 2017. "Household Debt Restructuring : The Re-default Effects of Debt Suspensions," Débats économiques et financiers 29, Banque de France.
    15. Wenli Li & Michelle J. White, 2009. "Mortgage Default, Foreclosure, and Bankruptcy," NBER Working Papers 15472, National Bureau of Economic Research, Inc.
    16. Michelle J. White, 2008. "Bankruptcy: Past Puzzles, Recent Reforms, and the Mortgage Crisis," NBER Working Papers 14549, National Bureau of Economic Research, Inc.
    17. Chintal Desai & Gregory Elliehausen & Jevgenijs Steinbuks, 2013. "Effects of Bankruptcy Exemptions and Foreclosure Laws on Mortgage Default and Foreclosure Rates," The Journal of Real Estate Finance and Economics, Springer, vol. 47(3), pages 391-415, October.

    More about this item

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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