Bankruptcy filings helped delinquent homeowners reduce the likelihood of a foreclosure auction by 70%, researchers have found.
The "Bankruptcy During Foreclosure: Home Preservation Through Chapters 7 and 13" report, published by researchers from the University of North Carolina, analyzed the interplay between actions taken by mortgage servicers to initiate foreclosure proceedings, bankruptcy and state foreclosure laws, and home foreclosure auctions, the final stage of the foreclosure process.
Researchers analyzed data from 4,280 lower-income homeowners who were more than 90 days delinquent on their 30-year fixed-rate mortgages. Only 8% of the homeowners in the study filed for bankruptcy, "perhaps due to the social stigma surrounding it," the researchers wrote.
The study found that delinquent homeowners who filed for Chapter 13 and Chapter 7 bankruptcy can immediately halt foreclosure proceedings and maintain ownership while they resolve their financial and delinquency issues.
Homeowners who filed for Chapter 13, which allows a debtor to keep property and pay debts in three to five years, were five times less likely to lose their home to auction than those who filed Chapter 7, which requires the liquidation of certain debtor assets to pay creditors. "While Chapter 7 bankruptcy relieves unsecured debts, Chapter 13 contains provisions for home protection through a debt repayment plan that cures mortgage arrears," the report explains.
Foreclosure auction delays after a bankruptcy filing tend to be longer in states that permit power-of-sale foreclosure than in the judicial foreclosure states, where court supervision over foreclosure proceedings is required, the researchers note.
In addition, "there was wide variation among mortgage servicers in their likelihood of bringing a property to auction."