The Effect of Principal Reduction on Household Distress: Evidence from Mortgage Cramdown
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.
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Copy CitationJacelly C. Cespedes, Carlos R. Parra, and Clemens Sialm, "The Effect of Principal Reduction on Household Distress: Evidence from Mortgage Cramdown," NBER Working Paper 28900 (2021), https://doi.org/10.3386/w28900.Download Citation
Published Versions
Jacelly Cespedes & Carlos Parra & Clemens Sialm & Manju Puri, 2026. "The Effect of Principal Reduction on Household Distress: Evidence from Mortgage Cramdown," The Review of Financial Studies, vol 39(2), pages 518-561.
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