Seismic effects of the bankruptcy reform

Donald P. Morgan (), Benjamin Iverson and Matthew Botsch

No 358, Staff Reports from Federal Reserve Bank of New York

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; Banking law; Subprime mortgage; Foreclosure; Financial crises (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ure
Date: 2008
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