Saving Your Home in Chapter 13 Bankruptcy

Michelle White and Ning Zhu

No 14179, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G33 G38 K35 R31 (search for similar items in EconPapers)
Date: 2008-07
New Economics Papers: this item is included in nep-law, nep-reg and nep-ure
Note: LE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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

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