Invisible Mortgages in Bankruptcy

This paper uncovers an overlooked way bankruptcy affects consumers: the presence of retained mortgages and their invisibility in post-bankruptcy credit reports. Most homeowners who filed for bankruptcy in recent years did not default on their primary mortgages or lose these properties: Credit reports reveal that approximately 70% of mortgagors in Chapter 7 bankruptcy and 56% of those in Chapter 13 bankruptcy filed with mortgages in good standing. Similarly, court records show that 74% of mortgagors in Chapter 7 bankruptcy intended to retain their mortgages and only 8% of these properties were foreclosed within three years. However, nearly 79% of these mortgages stopped being updated on credit reports after filing. Event studies show that this invisibility harms these homeowners, leading to a 15 to 30-point reduction in credit score recovery, a $500 decrease in average credit card limits, and a 1 percentage point increase in auto loan interest rates.