Sign Up for
Our free email newsletters
Sen. Elizabeth Warren (D-Mass.) wants to fix American bankruptcy law. Indeed, as she's told people many times, studying bankruptcy is what convinced Warren to quit her career as a Harvard professor and enter politics it's largely why she jumped ship from the Republicans to the Democrats, and why she became a populist progressive firebrand. As part of her campaign for the Democrats' presidential nomination, Warren just released a meaty plan to reform U.S. bankruptcy law.
The proposals are designed to once again make bankruptcy what it's intended to be: a balanced process that allows creditors to recoup some losses and gives debtors a genuine fresh start, while making sure both parties share responsibility for the failure. But how did American bankruptcy break in the first place? The key turning point was a 2005 law, backed by the banking and credit card industries, that made personal bankruptcy a lot harder to obtain.
Personal bankruptcy comes in two forms. Chapter 7 bankruptcy more or less wipes out people's debt, in exchange for their handing over assets and cash not protected by law from bankruptcy proceedings. The basic idea there is to allow the debtor to start over with a clean slate and make sure the creditor is reimbursed to some degree, but also that the debtor retains enough resources that they can actually start over. Chapter 13 bankruptcy allows the debtor to keep much more of their property, but also puts them on a long-term payment plan.
The Bankruptcy Abuse Prevention and Consumer Protection Act (or BAPCPA) of 2005 made a number of changes: It significantly increased the paperwork and fees required to file Chapter 7 for people making over 150 percent of the poverty line. It also made it a lot harder for people to take Chapter 7 over Chapter 13 if they made more than their state's median income. The law forbade Americans from getting rid of student loan debt through bankruptcy, and it instituted a number of other changes that generally made the process less forgiving.
In the years before the 2005 law, personal bankruptcies were on the rise, and champions of BAPCPA claimed people were abusing an overly lax system hence all the additional hurdles that BAPCPA brought. The law's proponents also argued that making bankruptcy harder to obtain would lower the cost of credit for all the other Americans who didn't file for bankruptcy. (Interestingly, BAPCPA's fans included one Senator Joseph Biden a Democrat from Delaware, where a huge proportion of America's credit card companies are based, and one of Warren's current challengers for the partys presidential nomination.)
Taking the opposite side of the fight were people like Warren, who argued that rising bankruptcies were caused not by personal shiftlessness, but by a decades-long trend of Americans getting squeezed by stagnating wages and ever-rising costs of living. That left working people in ever more precarious financial straits, in which one run of bad luck could pitch a family over the precipice. "The data showed that nearly 90 percent of these families were declaring bankruptcy for one of three reasons: a job loss, a medical problem, or a family breakup," Warren wrote.
Since BAPCPA's passage, it does look like credit became cheaper for Americans: "Typical credit card interest rates for people with fair credit might be in the mid- rather than low 20s had the reforms not been adopted," according to a summation of the research by Vox's Matt Yglesias. But the price of that reduction was that a lot of low-income families who aren't quite poor enough to fall below 150 percent of the poverty line got slammed by the increased paperwork and fees and the shift to more Chapter 13 filings. Filings for bankruptcy due to medical debt fell, and of course a lot of Americans were condemned to labor under student debt they couldn't get rid of. The period of time where people and families struggle with the decision whether to file bankruptcy nicknamed "the sweatbox" also grew considerably. That's more time in which people are bleeding down their finances, while banks and creditors continue to profit from their debt payments.
Warren's new plan proposes a number of reforms to BAPCPA. The centerpiece is she would combine Chapter 7 and Chapter 13 into one singular bankruptcy process, while doing away with the income tests and the higher fees and paperwork. Debtors would be able to choose the wipe-the-slate-clean approach or the payment-plan approach, depending on their needs. Warren would include student debt in the mix of debts that bankruptcy can do away with. Warren would also raise the amount of home equity that filers can hold onto during the bankruptcy process, and she would empower bankruptcy judges to adjust the payment terms of mortgages something the Obama administration promised to do in response to the 2008 housing crisis, and then reneged on.
Other noteworthy changes include allowing parents to protect more money for spending on their children during bankruptcy; allowing union members to keep paying their union dues; and allowing people to keep paying rent, so that the bankruptcy process doesn't result in their eviction. In fact, a lot of these alterations started life as amendments that lawmakers tried to attach to BAPCPA itself, but that were ultimately shot down.
In sum, Warren would make bankruptcy more affordable, accessible, and flexible for debtors, while simultaneously expanding the types of debt they can get rid of and the critical resources they can hold onto like homes, cars, and union benefits so that they actually can start again.
As for alternative ways to lower the costs of credit across the economy, Warren doesn't get into that. But lawmakers should consider hard legal caps on interest rates an idea floated by Rep. Alexandria Ocasio-Cortez (D-N.Y.) and Sen Bernie Sanders (I-Vt.) rather than trying to appease the banking industry by essentially sacrificing more American families to them.
Zooming out to the big picture, capitalism only functions when people are free to take risks without fearing that failure will be the end of them. Every loan is a risk; an effort to do something in the economy better than was done before. And a crucial thing to realize is that the decision to create the loan is a risk taken by the creditor as much as by the debtor both are equally responsible if the risk happens to not pan out. It's worth noting that corporations and wealthy individuals file for bankruptcy all the time often with far more advantages and options for protections than everyday consumers have and yet failure to pay debts in full only gets treated as a distinctly moral failing when everyday Americans are the debtors.
In that sense, the moral and social scales of bankruptcy have shifted much too far in favor of creditors which is to say, in favor of the rich and the powerful. Let's take a cue from Warren and push them back.
Want more essential commentary and analysis like this delivered straight to your inbox? Sign up for The Week's "Today's best articles" newsletter here.
See more here:
- Bankruptcy Filings | United States Courts - November 29th, 2021
- More colleges face bankruptcy even as top schools experience record wealth - CNBC - November 29th, 2021
- Boy Scouts will lobby on bill to curb tactics used in bankruptcy proceedings - Politico - November 29th, 2021
- Man who sought to conceal interest in 5m Dalkey property has bankruptcy extended - The Irish Times - November 29th, 2021
- Katie Price swerves final bankruptcy hearing AGAIN as court date is pushed back to February 2022... - The Sun - November 29th, 2021
- What happened to Love Actually cast Daniel Craig romance, bankruptcy, tragic death and rant over s*** &... - The Sun - November 29th, 2021
- TfL crisis latest: entire Tube line may have to close and bankruptcy notice issued - Evening Standard - November 29th, 2021
- Where Westlife are now from breakup and bankruptcy to successful comeback - Birmingham Live - November 29th, 2021
- Evergrande's bankruptcy still just a matter of time - Asia Times - November 29th, 2021
- Foreign creditors may soon be in charge of defaulting Indian companies assets - Livemint - November 29th, 2021
- Opinion: In appreciation of Neil E. Harl making farm credit work for everybody - Ames Tribune - November 29th, 2021
- Avianca to reoffer jobs to around 100 pilots amid restructuring - Reuters - November 29th, 2021
- Trainer hit with bankruptcy and forced to muck out completes remarkable comeback with Cheltenham and... - The Sun - November 29th, 2021
- Spendthrift Democrats ignore looming bankruptcy of Social Security and Medicare | TheHill - The Hill - September 5th, 2021
- Upstart company files for bankruptcy after trying to compete with The Villages - Villages-News - September 5th, 2021
- Circuit City bankruptcy headed for conclusion after nearly 13 years - RichmondBizSense - September 5th, 2021
- As mall owner Washington Prime Group exits bankruptcy, no one knows what it's worth - Crain's Cleveland Business - September 5th, 2021
- Ghost Ship Building Landlords to Pay $12M to Victims' Families, and Declare Bankruptcy - SFist - September 5th, 2021
- As Boy Scouts eye end to bankruptcy, tough work lies ahead in vetting, valuing sexual abuse claims - USA TODAY - September 5th, 2021
- FAQs: The actual difference between insolvency, bankruptcy, liquidation, and so on - Lexology - September 5th, 2021
- ROLI files for bankruptcy and will reboot as beginner-focused company Luminary - MusicTech - September 5th, 2021
- Bankruptcy: How It Works and How You Can Get It Off Your Credit Report - Brooklyn Reader - February 15th, 2021
- Hedge fund manager pleads guilty in Neiman Marcus bankruptcy case - Financial Times - February 4th, 2021
- Chesapeake Energy cuts 15% of workers as it emerges from bankruptcy - Reuters - February 4th, 2021
- Bankruptcy filings continue their record lows in New Hampshire - New Hampshire Business Review - February 4th, 2021
- Consolidated Appropriations Act of 2021 Amends Bankruptcy Code - Part 3: Congress Gives Suppliers and Landlords a Shiny New Arrow in their Quiver to... - February 4th, 2021
- The CFTC Adopts Comprehensive Amendments to Its Bankruptcy Rules - JD Supra - February 4th, 2021
- How to help homeowners when they file bankruptcy - Inman - February 4th, 2021
- Breathing Room for Commercial Tenants in Bankruptcy - The National Law Review - February 4th, 2021
- Weinstein Co. Bankruptcy Attorneys to Receive Millions More Than Victims - Variety - February 4th, 2021
- NRA says strongest financial position 'in years' despite filing for bankruptcy. Here's why - Fox Business - February 4th, 2021
- Sequoia Resources: Environmental obligations and the role of the trustee in bankruptcy - Lexology - February 4th, 2021
- Delaware Bankruptcy Court Provides Guidance on the Scope of The Automatic Stay - JD Supra - February 4th, 2021
- UWS LOccitane Closes Amid Bankruptcy After 30 Years Of Service - Upper West Side, NY Patch - February 4th, 2021
- AMC Theatres raises nearly $1 billion and avoids 'imminent' bankruptcy - Sunbury Daily Item - February 4th, 2021
- Party leaders spar over how to handle N.L. looming bankruptcy at leaders debate - The Globe and Mail - February 4th, 2021
- Belk plans to file for Chapter 11 bankruptcy protection, but stores will remain open - OBXToday.com - February 4th, 2021
- The State of Retail Bankruptcies in 2021 - WWD - January 5th, 2021
- Bankruptcy Trends To Watch In 2021 - Law360 - January 5th, 2021
- New Bankruptcy Relief Provisions Brought to You by the 2021 Federal Appropriations Act - JD Supra - January 5th, 2021
- Energy sector leads record wave of bankruptcies in 2020 - Houston Chronicle - January 5th, 2021
- JC Penney CEO Jill Soltau to leave retailer after it emerged from bankruptcy with new owners - CNBC - January 5th, 2021
- New Stimulus Deal: Amendments to the Bankruptcy Code - JD Supra - January 5th, 2021
- Some of Isaac Kassirers Harlem buildings head to bankruptcy - The Real Deal - January 5th, 2021
- Airline Shares Ended 2020 Down, But The Sky Did Not Fall And American Bankruptcy Chatter Turned Out To Be Nonsense - Forbes - January 5th, 2021
- Tenth Circuit BAP: Bankruptcy Courts Have Exclusive Jurisdiction to Determine Whether Claims Are Estate Property - JD Supra - December 17th, 2020
- AMC could benefit from bankruptcy, analysts say - CNBC - December 17th, 2020
- Top 10 Changes to Consumer Bankruptcy Proposed in the Consumer Bankruptcy Reform Act of 2020 - JD Supra - December 17th, 2020
- J.C. Penney closing more stores after exiting bankruptcy. Will your store close in March 2021? See the list. - USA TODAY - December 17th, 2020
- Retail bankruptcies in 2020 hit the highest levels in more than a decade, and experts say there are more to come - MarketWatch - December 17th, 2020
- Another Bankruptcy Court Weighs In On Postpetition Interest - Insolvency/Bankruptcy/Re-structuring - United States - Mondaq News Alerts - December 17th, 2020
- Covia expects to exit bankruptcy protection by the end of the year - Crain's Cleveland Business - December 17th, 2020
- Here Are the Major Retailers That Have Filed for Bankruptcy in 2020 - JCK - December 17th, 2020
- The coming wave of COVID-19 bankruptcies and how to mitigate them - MIT Sloan News - December 17th, 2020
- Should you close, sell or declare bankruptcy? What restaurants need to know. - Restaurant Dive - December 17th, 2020
- Yeah, We Can Take It - Texas Bankruptcy Court Defines the Scope of Its Post-Confirmation Jurisdiction - Lexology - December 17th, 2020
- Retail Bankruptcies in 2020: How the Fallout Will Play Out - Commercial Observer - December 17th, 2020
- Amid pandemic, thousands of North Carolinians file for bankruptcy despite relief efforts - Citizen Times - October 10th, 2020
- Retail Bankruptcies Could Go From Bad To Worse In 2021 - Forbes - October 10th, 2020
- J. Jill names new CEO after dodging bankruptcy this year - Retail Dive - October 10th, 2020
- Fewer Americans have filed for bankruptcy in 2020 than in 2019 - The Economist - October 10th, 2020
- How The Bankruptcy Code Protects Lenders And Harms Student Debtors And What One Lawyer Is Doing About It - Above the Law - October 10th, 2020
- Mallinckrodt Is Said to Be Near Bankruptcy Deal - TheStreet - October 10th, 2020
- The moral bankruptcy of the society - The Times of India Blog - October 10th, 2020
- Another Week Of Layoffs And Bankruptcies For Oil - OilPrice.com - October 10th, 2020
- JCPenney Moves Forward With Closures of 140-Plus Stores as It Seeks to Exit Bankruptcy - Footwear News - October 10th, 2020
- Dave & Busters watchers wonder if the chain will declare bankruptcy - Restaurant Business Online - September 20th, 2020
- 'Offensive.' Bankruptcy judge rejects Hertz employee incentive plans, executives would get second bonuses - News-Press - September 20th, 2020
- Judge rejects Hertz's bankruptcy bonuses to execs - MarketWatch - September 20th, 2020
- Shareholders of Dallas-based bankrupt retailer Tuesday Morning may be in the money - The Dallas Morning News - September 20th, 2020
- Dealing with default: workouts, restructuring, bankruptcy and litigation - Crain's New York Business - September 20th, 2020
- Regus throws 6 NYC locations into bankruptcy - The Real Deal - September 20th, 2020
- Largest Westchester hotel project in 20 years files for bankruptcy - The Real Deal - September 20th, 2020
- In The Loop: Regus Bankruptcy, Knotel's Legal Woes Continue, And More Industry News - AllWork.Space - September 20th, 2020
- GNC cancels bankruptcy auction, moves ahead with sale to Harbin - NutraIngredients-usa.com - September 20th, 2020
- European Restructuring and Bankruptcy Landscape - The National Law Review - August 12th, 2020
- JCPenney, Pier 1 Imports, Chuck E. Cheese and 13 other chains that have filed for bankruptcy this year - PennLive - August 10th, 2020
- Fewer Wisconsin Farms Filed For Bankruptcy During the Height Of The Pandemic - Wisconsin Public Radio News - August 10th, 2020
- Fashion World Slammed By Retail Bankruptcies - MMG Explains The Process - Forbes - August 10th, 2020
- Senate Bill Proposes To Expand Paycheck Protection Program To Businesses In BankruptcyBut With A Significant Catch - JD Supra - August 10th, 2020