New York Fed Paper: Seismic Effects of the Bankruptcy Reform

Donald P. Morgan, Benjamin Iverson and Matthew Botsch of the staff of the Federal Reserve Bank of New York have published a paper titled "Seismic Effects of the Bankruptcy Reform" .

We conclude that the bankruptcy abuse reform of 2005 (BAR) contributed to the rise in subprime foreclosures because it shifted risk from credit card and auto lenders to mortgage lenders. The means test under BAR gives credit card and other unsecured creditors a stronger claim on borrowers’ cash flow, and that weakens secured lenders’ (implicit) claim on that cash flow."

The obvious implication is that US credit card issuers' credit losses would be even higher at the moment if the old bankruptcy law was still in place. See also this article titled "U.S. mortgage meltdown linked to 2005 bankruptcy law" by Dan Morgolies of the Kansas City Star.

[Hat tip: Taking Charge's Twitter feed!]