The Effect of Principal Reduction on Household Distress: Evidence from Mortgage Cramdown

Abstract Mortgage cramdown enabled bankruptcy judges to discharge the underwater portion of a mortgage in a chapter 13 bankruptcy until the Supreme Court disallowed this practice in 1993. We investigate the impact of mortgage cramdown on household distress exploiting the random assignment of cases to judges. The impact of bankruptcy protection on foreclosures is reduced by more than half after the Supreme Court disallowed cramdown. Our results suggest that large principal reductions considerably decrease homeowners’ distress by reducing debt overhang.

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Publication Details

Journal
Review of Financial Studies
Published
2025-11-25
DOI
https://doi.org/10.1093/rfs/hhaf104
Primary Topic
Corporate Insolvency and Governance
Type
article
Field-Weighted Citation Impact
0.00
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article

The Effect of Principal Reduction on Household Distress: Evidence from Mortgage Cramdown

Clemens Sialm, Jacelly Céspedes, C. Parra
Review of Financial Studies
Corporate Insolvency and Governance
article

The Effect of Principal Reduction on Household Distress: Evidence from Mortgage Cramdown

Clemens Sialm, Jacelly Céspedes, C. Parra
article en

Abstract

Abstract Mortgage cramdown enabled bankruptcy judges to discharge the underwater portion of a mortgage in a chapter 13 bankruptcy until the Supreme Court disallowed this practice in 1993. We investigate the impact of mortgage cramdown on household distress exploiting the random assignment of cases to judges. The impact of bankruptcy protection on foreclosures is reduced by more than half after the Supreme Court disallowed cramdown. Our results suggest that large principal reductions considerably decrease homeowners’ distress by reducing debt overhang.

Review of Financial StudiesVol. 39(2)
Pontificia Universidad Católica de Chile (CL), University of Minnesota System (US), The University of Texas at Austin (US)
Openalex Percentile: Top 49%
Corporate Insolvency and Governance
DOISourceOpenAlex
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