Seismic Effects of the Bankruptcy Reform
Donald P. Morgan
Federal Reserve Bank of New York
Benjamin Charles Iverson
Northwestern University - Kellogg School of Management
Matthew J. Botsch
February 1, 2009
FRB of New York Staff Report No. 358
We argue that the 2005 bankruptcy abuse reform (BAR) contributed to the surge in subprime foreclosures that followed its passage. Before BAR, distressed mortgagors could free up income by filing bankruptcy and having their unsecured debts discharged. BAR blocks that maneuver for better-off filers by way of a means test. We identify the effects of BAR using state home equity bankruptcy exemptions; filers in low-exemption states were not very protected before BAR, so they would be less affected by the reform. Difference-in-difference regressions confirm four predictions implied by that identification strategy. Our findings add to research trying to explain the surge in subprime foreclosures and to a broader literature on household bankruptcy demand and credit supply.
Number of Pages in PDF File: 30
Keywords: bankruptcy, subprime foreclosures, subprime mortgages, unsecured debt, credit card debt, home equity exemptions
JEL Classification: G21, G33, K35
Date posted: December 2, 2008 ; Last revised: September 18, 2012
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