Defaulting homeowners can walk away from their problem after declaring bankruptcy. There are significant advantages to this option. It allows these people to make a new start, and return to the labor market free from debt. The risk of such defaults is built into banking models, and the costs are distributed among other borrowers. However, this system has never been tested under the extremely stressful conditions of a bursting asset-price bubble.
Jonathan Wyse
Jonathan Wyse is a foundation scholar in economics at Trinity College, Dublin. See his blog.
