Abstract:
Filing for bankruptcy is the primary legal mechanism by which homeowners in foreclosure can exert control over ownership of their home, yet little is known about the interplay between bankruptcy chapters, mortgage servicers, state foreclosure laws, and home foreclosure auctions. We analyze 4,280 lower-income homeowners in the United States who were more than 90 days late paying their 30-year fixed-rate mortgages. Two dozen organizations serviced these mortgages and initiated foreclosure between 2003 and 2012. We identify wide variation between mortgage servicers in their likelihood of bringing the property to auction. We also show that when homeowners in foreclosure filed for bankruptcy, foreclosure auctions were 70% less likely. Chapters 7 and 13 both reduce the hazard of auction, but the effect is five times greater for Chapter 13, which contains enhanced tools to preserve home ownership. Bankruptcy’s effects are strongest in states that permit power-of-sale foreclosure or withdraw homeowners’ right-of-redemption at the time of auction.
Summary:
This study regarding the interplay between foreclosure, bankruptcy and methods of foreclosure, i.e. judicial or power-of-sale, is very valuable, particularly as it may be unique in focusing not only on the number of foreclosure proceedings that are begun, but instead on the number of foreclosure auctions.
Among its many other findings, this study holds that the median length of time from initiation of a foreclosure until auction is 8 months for those that do not file bankruptcy, 16 months for those that file Chapter 7, and 26 months for Chapter 13 debtors. Further, this increase is even more pronounced in states, such as North Carolina, where nearly all foreclosures are non-judicial.
Commentary:
This study is a welcome anodyne to the too common academic conclusion that, due to the numbers of cases that do not result in a discharge, Chapter 13 is a “pretend solution.” See: http://ncbankruptcyexpert.com/?p=502 A home owner that is able to stay in their house for, on median, 1 ½ years longer by filing Chapter 13 is not likely to view that as a “failure.” (And it is not clear if the calculated delay includes only home which the debtor attempted to retain. Exclusion of surrendered houses, which is more like delinquent houses in Chapter 7, would show an even greater increase in the delay of foreclosure.)
The study also commends judicial oversight of foreclosure, implying that in power-of-sale states, bankruptcy judges serve the role that is otherwise lacking compared to judicial foreclosure jurisdictions. It is also worth noting, and should be studied further, that distressed home owners likely benefit from having their own attorney. In non-judicial foreclosure states, particularly where, as in North Carolina, a foreclosure is authorized upon a showing of very narrow facts, attorney involvement is minimized, absent bringing separate law suits to enjoin or counter-claim. In both judicial and power-of-sale states, attorney assistance for distressed home owners is further limited by the simple fact that most people facing foreclosure, by definition, lack the funds to pay a lawyer. The Chapter 13 system, however, nearly always provides a means for an attorney to be paid, over time, but with immediately relief being granted and the foreclosure halted.
The differences found between the benefits of bankruptcy in delaying foreclosure auctions in judicial and power-of-sale jurisdictions, could also be a significant factor in why a greater percentage of bankruptcy filings consist of Chapter 13 cases in some locations than others.
For a copy of the opinion, please see:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2344444
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