CFDP 2327

Consumer Bankruptcy, Mortgage Default and Labor Supply

Author(s): 

Publication Date: March 2022

Pages: 51

Abstract: 

We specify and estimate a lifecycle model of consumption, housing demand and labor supply in
an environment where individuals may file for bankruptcy or default on their mortgage. Uncertainty
in the model is driven by house price shocks, education specific productivity shocks, and catastrophic
consumption events, while bankruptcy is governed by the basic institutional framework in the US as
implied by Chapter 7 and Chapter 13. The model is estimated using micro data on credit reports and
mortgages combined with data from the American Community Survey. We use the model to understand
the relative importance of the two chapters (7 and 13) for each of our two education groups that differ in
both preferences and wage profiles. We also provide an evaluation of the BAPCPA reform. Our paper
demonstrates importance of distributional effects of Bankruptcy policy.

Keywords: Lifecycle, Bankruptcy, Housing, Mortgage Default, Labor Supply, Consumption, Education, Insurance, Moral hazard.

JEL Classification Codes: G33, K35, J22, J31, D14, D18, D52, D53, E21


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