Philly Fed blames subprime crisis on bankruptcy reform

federal reserve

A paper published by the Federal Reserve Bank of Philadelphia in April argues that the US bankruptcy reform of 2005 played an important role in the mortgage crisis and the current recession.

According to the paper, when debtors file for bankruptcy, credit card debt and other types of debt are discharged - thus loosening debtors' budget constraints. Homeowners in financial distress can, therefore, use bankruptcy to avoid losing their homes, since filing allows them to shift funds from paying

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