Our previous post showed that the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was associated with a sizable rise in foreclosure, in addition to a decline in bankruptcy filings and a rise in insolvency. In this post, we examine one possible explanation for the rise in foreclosure: the substitution hypothesis. Prior to the 2005 reform, individuals facing insolvency could discharge their unsecured debt via bankruptcy, thus retaining the ability to remain current on their home debts. After the reform, since bankruptcy became too expensive for many, default on home loans was the most effective way for these individuals to reduce outstanding debt. The idea that BAPCPA caused a shift from bankruptcy to foreclosure is not new; see Morgan et al. (2012) and Li, White, and Zhu (2011). In this post, we use the Federal Reserve Bank of New York’s Consumer Credit Panel (based on Equifax data, described here) to provide evidence on the mechanism through which this substitution occurred, and to precisely quantify the magnitude of its impact on foreclosures.