Keywords
bankruptcy abuse reform, subprime foreclosures, means test restrictions
Abstract
After the bankruptcy abuse reform (BAR) took effect in October 2005, foreclosures on subprime mortgages surged nationwide.
Prior to BAR, overly indebted borrowers could file bankruptcy to free up income to pay their mortgage by discharging unsecured debts; BAR eliminated that option for better-off filers through a means test and other requirements, making it more difficult to save one’s home by filing bankruptcy.
A study of the reform suggests that BAR was associated with more subprime foreclosures; BAR’s effects were greater in states with high bankruptcy exemptions, as theory predicts.
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 nationwide, that translates into 29,000 additional subprime foreclosures per quarter nationwide.
Original Publication Citation
“Subprime Foreclosures and the 2005 Bankruptcy Reform,” with Donald Morgan and Matthew Botsch, Federal Reserve Bank of New York Economic Policy Review 18, No. 1 (March 2012): 47-57.
BYU ScholarsArchive Citation
Morgan, Donald P.; Iverson, Benjamin; and Botsch, Matthew, "Subprime Foreclosures and the 2005 Bankruptcy Reform" (2012). Faculty Publications. 8980.
https://scholarsarchive.byu.edu/facpub/8980
Document Type
Peer-Reviewed Article
Publication Date
2012
Publisher
Federal Reserve Bank of New York Economic Policy Review
Language
English
College
Marriott School of Business
Department
Finance
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