STEPHEN J. LUBBEN, Seton Hall University - School of Law
Email: lubbenst@shu.edu

The United States' adoption of chapter 11 in the late 1970s began a process of world-wide reevaluation of the mechanisms for resolving financial distress. Especially following a series of financial shocks in the 1990s, corporate reorganization procedures have become vital parts of the new commercial laws of developing economies. At the same time, the United States and other developed economies have recently enacted procedures that suggest an increased willingness to respect and support reorganization in emerging markets. As signs of convergence, albeit at the most general of levels, begin to emerge with regard to the resolution of private-sector financial distress, the reality of global financial integration has greatly complicated the resolution of sovereign financial distress. In short, the general financial distress framework in emerging markets is still a work in progress, leaving gaps for regulators to address and investors to exploit.

ALAN M. WHITE, Valparaiso University - Law School
Email: Alan.White@valpo.edu

The 2007 subprime mortgage crisis resulted in home foreclosures at unprecedented levels, and calls for government action. The Bush Administration's response relied primarily on exhorting the mortgage industry to voluntarily modify the terms of existing mortgages to help struggling homeowners reduce their debt burden and bring mortgage debt in line with declining home values. Industry reports have tallied the rapid increase in voluntarily negotiated workouts, without specifying what the terms of those workouts have been.

To better understand the effectiveness of the voluntary mortgage crisis resolution plan, this paper reports detailed empirical information from a newly-created database. Loan-level information on the number and type of negotiated mortgage modifications was compiled from monthly servicer remittance reports from July 2007 through June 2008 for twenty-six mortgage loan pools.

The data show that while the number of modifications rose rapidly during the crisis, mortgage modifications in the aggregate are not reducing subprime mortgage debt. Mortgage modifications rarely if ever reduced principal debt, and in many cases increased the debt. Nor are modification agreements uniformly reducing payment burdens on households. About half of all loan modifications resulted in a reduced monthly payment, while many modifications actually increased the monthly payment. Finally, there is tremendous variation in the extent, if any, of payment relief offered by different mortgage servicers.

The combined effect of dwindling refinancing activity and modifications that do not write down mortgage debt, and in many cases do not even reduce monthly payments, is to delay, but not prevent, large numbers of foreclosures. Given the continuing accumulation of loans in the foreclosure and real-estate-owned categories, the subprime crisis will be worked out only over many years through painstakingly slow repayment, foreclosure and disposition of properties.

ADRIAN WALTERS, Nottingham Trent University
Email: adrian.walters@ntu.ac.uk

Since the mid-1990s the number of consumer insolvencies in England and Wales has grown exponentially. The UK's Insolvency Act 1986 offers two formal responses to personal insolvency: bankruptcy and individual voluntary arrangements ('IVAs'). While consumers have used both these debt relief mechanisms in increasing numbers in recent years, IVAs - regulated agreements between debtors and creditors facilitated by a licensed insolvency practitioner, usually taking the form of a five-year payment plan - grew faster than bankruptcies between 2003 and 2006. However, the level of new IVA approvals fell back in 2007 and the first half of 2008. This article charts the transformation of the IVA from a bankruptcy alternative originally designed for insolvent traders and professionals into a tool of consumer debt relief. It then seeks to explain both the stellar rise in IVA usage among consumer debtors and the subsequent stalling of IVA growth. The rise of consumer IVAs can be attributed largely to supply side changes in the market for debt resolution - in particular the emergence of volume providers commonly referred to as 'IVA factories' - while a sustained backlash against the procedure and the providers instigated by institutional creditors demanding higher recoveries accounts for the subsequent decline in approvals. The article concludes by considering the near term prospects for consumer IVAs within the context of the increasingly complex UK debt resolution market.

PAIGE MARTA SKIBA, Vanderbilt Law School
Email: paige.skiba@vanderbilt.edu
JEREMY TOBACMAN, University of Pennsylvania
Email: tobacman@wharton.upenn.edu

An estimated ten million American households borrow on payday loans each year. Despite the prevalence of these loans, little is known about the effects of access to this form of short-term, high-cost credit. We match individual-level administrative records on payday borrowing to public records on personal bankruptcy, and we exploit a regression discontinuity to estimate the causal impact of access to payday loans on bankruptcy filings. Though the size of the typical payday loan is only $300, we find that loan approval for first-time applicants increases the two-year Chapter 13 bankruptcy filing rate by 2.48 percentage points. There appear to be two components driving this large effect. First, consumers are already financially stressed when they begin borrowing on payday loans. Second, approved applicants borrow repeatedly on payday loans and pawn loans, which carry very high interest rates. For the subsample that identifies our estimates, the cumulative interest burden from payday and pawn loans amounts to roughly 11% of the total liquid debt interest burden at the time of bankruptcy filing.