Seismic Effects of the Bankruptcy Reform

30 Pages Posted: 2 Dec 2008 Last revised: 18 Sep 2012

Date Written: February 1, 2009

Abstract

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.

Keywords: bankruptcy, subprime foreclosures, subprime mortgages, unsecured debt, credit card debt, home equity exemptions

JEL Classification: G21, G33, K35

Suggested Citation

Morgan, Donald P. and Iverson, Benjamin Charles and Botsch, Matthew J., Seismic Effects of the Bankruptcy Reform (February 1, 2009). FRB of New York Staff Report No. 358. Available at SSRN: https://ssrn.com/abstract=1310304 or http://dx.doi.org/10.2139/ssrn.1310304

Donald P. Morgan (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
Research Department
New York, NY 10045
United States
212-720-6573 (Phone)

Benjamin Charles Iverson

Northwestern University - Kellogg School of Management ( email )

Evanston, IL 60208
United States

Matthew J. Botsch

Bowdoin College ( email )

Brunswick, ME 04011
United States

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