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Subprime foreclosures and the 2005 bankruptcy reform

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  • Donald P. Morgan
  • Benjamin Iverson
  • Matthew Botsch
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    Abstract

    This article presents arguments and evidence suggesting that the bankruptcy abuse reform (BAR) of 2005 may have been one contributor to the destabilizing surge in subprime foreclosures. Before BAR took effect, overly indebted borrowers could file bankruptcy to free up income to pay their mortgage by having their credit card and other unsecured debts discharged. BAR eliminated that option for better-off filers through a means test and other requirements, thus making it harder to save one’s home by filing bankruptcy. By way of evidence, the authors show that the impact of BAR was greater in U.S. states where one would expect it to have a larger impact—namely, in states with high bankruptcy exemptions. Filers in low-exemption states were not very protected before BAR, so they were less likely to be affected by the reform. The authors estimate that for a state with an average home equity exemption, the subprime foreclosure rate after BAR rose 11 percent relative to average before the reform; given the number of subprime mortgages in the United States, that figure translates into 29,000 additional subprime foreclosures per quarter nationwide attributable to BAR.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of New York in its journal Economic Policy Review.

    Volume (Year): (2012)
    Issue (Month): Mar ()
    Pages: 47-57

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    Handle: RePEc:fip:fednep:y:2012:i:mar:p:47-57:n:v.18no.1

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    Keywords: Bankruptcy ; Foreclosure ; Subprime mortgage ; Banking law ; Credit;

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    1. Michelle J. White & Ning Zhu, 2008. "Saving Your Home in Chapter 13 Bankruptcy," NBER Working Papers 14179, National Bureau of Economic Research, Inc.
    2. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, MIT Press, vol. 125(1), pages 307-362, February.
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