The Effect of Principal Reduction on Household Distress: Evidence from Mortgage Cramdown
59 Pages Posted: 20 Oct 2020 Last revised: 2 Jun 2021
Date Written: May 31, 2021
Mortgage cramdown enabled bankruptcy judges to discharge the underwater portion of a mortgage during Chapter 13 bankruptcy before the Supreme Court disallowed this practice in 1993. We exploit the random assignment of cases to judges to quantify the ex-post effects of Chapter 13 bankruptcy over the period from 1989 to 1993. We find that a successful Chapter 13 filing in a cramdown court substantially decreases the five-year foreclosure rate, the propensity to move, and the crime rate. Our results suggest that principal write-down considerably reduces homeowner's distress.
Keywords: Debt Relief, Principal Reduction, Debt Overhang, Foreclosures, Consumer Bankruptcy, Housing Policies
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