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Bankruptcy Reform and the Housing Crisis

47 Pages Posted: 10 Feb 2012 Last revised: 8 May 2015

Matthew N. Luzzetti

University of California, Los Angeles (UCLA)

Seth Neumuller

Wellesley College - Department of Economics

Date Written: March 7, 2014

Abstract

Reforms made to the U.S. Bankruptcy Code in 2005 instituted a new means testing requirement that restricts the discharge of unsecured debt under Chapter 7 to filers with income below their state's median, thereby forcing filers with income above their state's median into a costly Chapter 13 repayment plan. We construct a quantitative equilibrium model of the mortgage and unsecured credit markets to assess the impact of this reform on the severity of the housing crisis during the Great Recession. We find that while this reform increased the relative attractiveness of mortgage default, its impact on the housing market during the crisis was largely mitigated by general equilibrium effects on mortgage lending standards. Allowing bankruptcy judges to reduce mortgage principal for underwater homeowners through a policy of cramdown would have had only a small impact on the mortgage default rate during the crisis.

Keywords: Bankruptcy, Mortgage Default, Foreclosures, Housing Crisis, BAPCPA

JEL Classification: K35, E44, G21, R21

Suggested Citation

Luzzetti, Matthew N. and Neumuller, Seth, Bankruptcy Reform and the Housing Crisis (March 7, 2014). Available at SSRN: https://ssrn.com/abstract=2001777 or http://dx.doi.org/10.2139/ssrn.2001777

Matthew N. Luzzetti (Contact Author)

University of California, Los Angeles (UCLA) ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States

Seth Neumuller

Wellesley College - Department of Economics

PNE 416
106 Central Street
Wellesley, MA 02481
United States

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