Delinquent homeowners who file for bankruptcy 70 percent less likely to lose their homes

HousingPolicyDebate (2)Filing for bankruptcy is the primary legal mechanism by which homeowners in foreclosure can maintain ownership of their home while they resolve their financial and delinquency issues.

Yet little is known about what happens after mortgage servicers initiate foreclosure proceedings and the interplay of bankruptcy types, mortgage servicers, state foreclosure laws and home foreclosure auctions –- the final stage of the foreclosure process.

In “Bankruptcy During Foreclosure: Home Preservation Through Chapters 7 and 13,” published in Housing Policy Debate, researchers from UNC Center for Community Capital in the College of Arts and Sciences and UNC School of Law assess the impact of filing for bankruptcy on foreclosure auctions.

Researchers found that filing for bankruptcy reduced the likelihood of a foreclosure auction by 70 percent. Those who filed Chapter 13 were five times less likely to lose their home to auction than those who filed Chapter 7. Both types of bankruptcy immediately halt foreclosure proceedings. But while Chapter 7 bankruptcy relieves unsecured debts, Chapter 13 contains provisions for home protection through a debt repayment plan that cures mortgage arrears.

Researchers also found that bankruptcy’s delay of the foreclosure auction is longer in states that permit power-of-sale foreclosure –- in which the property can be auctioned without filing a lawsuit –- when compared to judicial review states that require court supervision over foreclosure proceedings.

Center researchers analyzed data from 4,280 lower-income homeowners in the United States who were more than 90 days late paying their 30-year fixed-rate mortgages. More than two dozen organizations serviced these mortgages and initiated foreclosure between 2003 and 2012.

They found wide variation among mortgage servicers in their likelihood of bringing a property to auction. They also found that only 8 percent of homeowners in the study filed for bankruptcy, perhaps due to the social stigma surrounding it.

Given the negative impact of foreclosure sales on homeowners and neighborhood property values, the report offers insights on a range of state and federal policy issues related to foreclosure, bankruptcy and mortgage servicing.

The report is available for download at