The Housing Crisis and Bankruptcy Reform: The Prepackaged Chapter 13 Approach

Luigi Zingales and Eric A Posner

No 7204, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The housing crisis threatens to destroy hundreds of billions of dollars of value by causing homeowners with negative equity to walk away from their houses. A house in foreclosure is worth 30 to 50 percent less than a house that a homeowner either retains or sells on the market, and a foreclosed house damages neighboring property values as well. We advocate a reform of Chapter 13 that would allow homeowners to strip down the value of their mortgages in a prepackaged bankruptcy. Such a plan would give homeowners an incentive to keep or resell their homes, thus reducing the market value loss of homes while protecting the effective value of creditors? interests. Two further key elements of the plan are that it uses prices based on the average house price in a particular ZIP code, which reduces moral hazard; and it is automated, requiring only a rubber stamp by a bankruptcy judge or other official, thus preserving judicial resources. Other plans, including that of the Obama administration, are compared.

Keywords: Bankruptcy; Chapter 13; Housing (search for similar items in EconPapers)
JEL-codes: K35 R28 (search for similar items in EconPapers)
Date: 2009-03
New Economics Papers: this item is included in nep-law, nep-reg and nep-ure
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