Bankruptcy, Race, and Homeownership: Does the Decision to File Preserve Homeownership?

Fenaba Addo, University of Wisconsin-Madison
J. Michael Collins, University of Wisconsin-Madison

How do existing legal structures contribute to or mitigate wealth building and economic disparities within our society? Blacks and Hispanics comprise a disproportionate share of households who file for consumer bankruptcy. They are also more likely to experience foreclosure. This study examines the behavior of households with mortgage loans during the peak of the housing boom and subsequent bust. Specifically, we examine the influence of bankruptcy on the probability of mortgage default and foreclosure using a monthly panel dataset of about 230,000 private label largely subprime mortgages originated between 2004 and 2006 and tracked through January 2013. We show the demographic, socioeconomic, and local geographic factors predicting the probability that a household files for bankruptcy with particular attention to racial differences in delinquency and default. We then estimate whether filing for bankruptcy is associated with the likelihood of mortgage default or foreclosure, including testing state variations in bankruptcy provisions.