American Law and Economics Review Advance Access originally published online on February 25, 2009
American Law and Economics Review 2009 11(1):1-23; doi:10.1093/aler/ahp002
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Bankruptcy: Past Puzzles, Recent Reforms, and the Mortgage Crisis
UCSD and NBER
Send correspondence to: Department of Economics, University of California at San Diego, La Jolla, CA 92093, USA; Telephone: 858-534-2783; Fax: 858-534-7040; E-mail: miwhite{at}ucsd.edu.
JEL Classification: E51, K35, R21
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Abstract |
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This paper discusses four bankruptcy-related policy issues. First, what is the economic rationale for having a bankruptcy procedure at all and what defines an economically efficient bankruptcy procedure? Second, why did the number of U.S. bankruptcy filings increase so dramatically between 1980 and 2005? Third, a major bankruptcy reform went into effect in the United States in 2005—what did it do and how did it affect credit and mortgage markets? Finally, the paper discusses the mortgage crisis, the high social cost of foreclosures, and the difficulty of avoiding foreclosure by voluntarily renegotiation of mortgage contracts, even when such renegotiations are in the joint interest of debtors and creditors. I also discuss the pros and cons of government programs to refinance mortgages and the argument for giving bankruptcy judges new power to change the terms of residential mortgage contracts in bankruptcy.
This is an expanded version of the talk that I gave as President of the American Law and Economics Association, which took place at the 18th Annual ALEA Meeting on May 16–17, 2008.