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Title:Seismic effects of the bankruptcy reform PDF Logo
Authors:Morgan, Donald P.
Iverson, Benjamin
Botsch, Matthew
Issue Date:2009
Series/Report no.:Staff Report, Federal Reserve Bank of New York 358
Abstract:We argue that the 2005 bankruptcy abuse reform (BAR) contributed to the surge in subprime foreclosures that followed its passage. Before BAR, over-indebted mortgagors could free up income to pay the mortgage 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.
Subjects:Bankruptcy
subprime foreclosures
subprime mortgages
unsecured debt
credit card debt
home equity exemptions
cram-down
JEL:G21
G33
K35
Document Type:Working Paper
Appears in Collections:Staff Reports, Federal Reserve Bank of New York

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