Did U.S. Bankruptcy Laws Exacerbate the Housing Crisis?

Posted on December 28, 2009. Filed under: Uncategorized |

In an interesting article in the Wall Street Pit ,the authors argue that the 2005 changes to the bankruptcy law led in part to the recent housing crisis:

The financial crisis of 2008 and the current recession were triggered by the bursting of the housing bubble and the subprime mortgage crisis that began in late 2006/early 2007 (Reinhart 2008). But US personal bankruptcy law also played an important role.

“In 2005, major reform of US bankruptcy law sharply increased debtors’ cost of filing for bankruptcy. This caused a sharp reduction in the number of filings. Because credit card debts and other types of unsecured debt are discharged in bankruptcy, filing for bankruptcy loosens homeowners’ budget constraints and makes paying the mortgage easier. Thus the 2005 reform set the stage for an increase in mortgage defaults by making bankruptcy less readily available.”

full article

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