Saving Your Home in Chapter 13 Bankruptcy

This paper examines how filing for bankruptcy under Chapter 13 helps financially distressed homeowners. We develop a model of debtors' decisions to default on their mortgages and file for bankruptcy and evaluate it using a new data set of debtors who filed for bankruptcy under Chapter 13 in 2006. We also examine the effect of introducing cram down of residential mortgages in Chapter 13, which would reduce the total amount that debtors owe. We find that 96 percent of Chapter 13 filers are homeowners and 79 percent of filers repay mortgage debt in their repayment plans, while just 9 percent of filers replay only unsecured debt in their plans. Thus, filers use Chapter 13 almost exclusively as a save-your-home procedure. Under current law, only about 1 percent of Chapter 13 filers who would otherwise have defaulted save their homes, but this fraction would increase to 10 percent if cram down were introduced. We estimate that the cost to lenders of cram down would be $264,000 per home saved and $30 billion in total. (c) 2010 by The University of Chicago. All rights reserved.