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Foreclosure and Bankruptcy--Policy Conclusions from the Current Crisis

Author

Listed:
  • Theresa Kuchler

    () (Stanford University)

  • Johannes Stroebel

    () (Stanford University)

Abstract

The recent episode of rising consumer bankruptcy and increasing foreclosure rates has sparked a lively debate about how to best tackle the crisis in the U.S. housing market. This paper contributes to the debate by providing an explicit model of the interactions of households' decisions to declare Chapter 7 bankruptcy, and to enter into foreclosure. We construct a model to show that the interaction of bankruptcy exemption limits and mortgage regulation has an impact on the prevalence of bankruptcy and foreclosure. We use state-level data to show empirically that our model predictions are plausible. We argue that policy proposals that focus solely on one aspect of the twin-crisis are likely to be misguided. In particular, we show that in the short-run a switch from non-recourse mortgages to recourse mortgages may have little effect on foreclosures, but could dramatically increase the number of bankruptcies.

Suggested Citation

  • Theresa Kuchler & Johannes Stroebel, 2009. "Foreclosure and Bankruptcy--Policy Conclusions from the Current Crisis," Discussion Papers 08-037, Stanford Institute for Economic Policy Research.
  • Handle: RePEc:sip:dpaper:08-037
    as

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    File URL: http://www-siepr.stanford.edu/repec/sip/08-037.pdf
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    References listed on IDEAS

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    Cited by:

    1. Wenli Li & Ishani Tewari & Michelle J. White, 2014. "Using Bankruptcy to Reduce Foreclosures: Does Strip-down of Mortgages Affect the Supply of Mortgage Credit?," NBER Working Papers 19952, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    forecloser; bankruptcy; housing crisis; mortgage;

    JEL classification:

    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law

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