The Housing Crisis and Bankruptcy Reform: The Prepackaged Chapter 13 Approach

In 2008, banks commenced foreclosure proceedings on 2.2 million homes. This year could be worse.1 While economists disagree on whether this is the worst economic crisis since the Great Depression, everybody agrees that this is the worst real estate crisis since the Great Depression. Foreclosure is not just a human tragedy, it is an economic tragedy as well. Foreclosed houses are poorly maintained if not looted. As a result, foreclosed properties lose a substantial fraction of their value, between 30 and 50 percent.2 If this was not enough, foreclosure has some very negative spillover effects. Forced sales depress the value of the surrounding properties. When forced sales become frequent, they undermine the value of a neighborhood, pushing other people to sell or default. Finally, widespread defaults reduce the social stigma of defaulting, leading to the possibility of a vicious circle of default causing other defaults, depressing real estate prices further and causing still more defaults.3