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:
How bankruptcy was broken - The Week
- Alitalia Files for Bankruptcy, but Italy Balks at a Third Bailout - New York Times - May 3rd, 2017 [May 3rd, 2017]
- A Slow Bankruptcy Process Stops Locale-Reviving Jobs - Wall Street Journal (subscription) - May 3rd, 2017 [May 3rd, 2017]
- Bankruptcy auction for property of NASCAR artist Sam Bass ... - Charlotte Observer - May 3rd, 2017 [May 3rd, 2017]
- Obamacare helped make a 50% dent in personal bankruptcies ... - MarketWatch - May 3rd, 2017 [May 3rd, 2017]
- Pennsylvania Toy Seller Files For Bankruptcy - Wall Street Journal (subscription) - May 3rd, 2017 [May 3rd, 2017]
- Puerto Rico Enters Bankruptcy - Wall Street Journal (subscription) - May 3rd, 2017 [May 3rd, 2017]
- Puerto Rico Declares a Form of Bankruptcy - New York Times - May 3rd, 2017 [May 3rd, 2017]
- Farmer Mac Early Exclusive: Farm Bankruptcy Rates Low - AgWeb - June 6th, 2017 [June 6th, 2017]
- Washington weighs in on Westinghouse bankruptcy | News ... - Aiken Standard - June 6th, 2017 [June 6th, 2017]
- 4 Reasons Why Puerto Rico's 'Bankruptcy' Process Matters to US Residents - NBCNews.com - June 6th, 2017 [June 6th, 2017]
- Valeant: There Is Significant Bankruptcy Risk Here - Seeking Alpha - June 6th, 2017 [June 6th, 2017]
- Westinghouse bankruptcy draws federal scrutiny as VC Summer nuclear project's future remains unclear - Charleston Post Courier - June 6th, 2017 [June 6th, 2017]
- Bebe Avoids Bankruptcy Filing With Real-Estate Deals - Wall Street Journal (subscription) - June 6th, 2017 [June 6th, 2017]
- rue21 Bankruptcy Objections Filed - Bankrupt Company News (press release) (blog) - June 7th, 2017 [June 7th, 2017]
- ISH to emerge from bankruptcy as Seacor subsidiary - WorkBoat (blog) - June 7th, 2017 [June 7th, 2017]
- Curtains for the Pearl, as the Theater Company Files for Bankruptcy - New York Times - June 7th, 2017 [June 7th, 2017]
- Bankruptcy fraud earns Pepperell man 18 months | Boston Herald - Boston Herald - June 9th, 2017 [June 9th, 2017]
- Vikki Lindemuth favors appointment of trustee to handle husband's bankruptcy - Topeka Capital Journal - June 9th, 2017 [June 9th, 2017]
- Creditors seek to force bankruptcy of Tinley Park firm - Chicago Tribune - June 9th, 2017 [June 9th, 2017]
- Abengoa Bankruptcy Liquidation Plan Confirmed - Bankrupt Company News (press release) (blog) - June 9th, 2017 [June 9th, 2017]
- Retailer BCBG Unveils Going-Concern Bankruptcy Sales - Wall Street Journal (subscription) - June 9th, 2017 [June 9th, 2017]
- For Hartford, bankruptcy not an easy way out - The CT Mirror - June 9th, 2017 [June 9th, 2017]
- Why Students Should Be Able To Declare Bankruptcy On Their Loans - ATTN: - June 10th, 2017 [June 10th, 2017]
- Bankruptcy forces curtain to fall on community theater - Chicago Tribune - June 10th, 2017 [June 10th, 2017]
- Ex-Pepperell man jailed in bankruptcy case - Lowell Sun - June 10th, 2017 [June 10th, 2017]
- Owner of Joe's Crab Shack files for bankruptcy | Jacksonville News ... - Florida Times-Union - June 11th, 2017 [June 11th, 2017]
- Why test for bankruptcy law is a larger test for India - The Indian Express - June 11th, 2017 [June 11th, 2017]
- Tax trouble firms' most likely road to bankruptcy - Albuquerque Journal - June 12th, 2017 [June 12th, 2017]
- Darius Miles' Bankruptcy Sale Includes Signed LeBron James, Larry ... - Bleacher Report - June 12th, 2017 [June 12th, 2017]
- Winter Haven attorney gets prison for concealing assets in ... - News Chief - June 12th, 2017 [June 12th, 2017]
- Children's retailer Gymboree files bankruptcy, closing up to 450 stores - USA TODAY - June 12th, 2017 [June 12th, 2017]
- Another retailer has filed for bankruptcy - mySanAntonio.com - June 13th, 2017 [June 13th, 2017]
- Esperanza Unida bankruptcy delays city redevelopment efforts - BizTimes.com (Milwaukee) - June 13th, 2017 [June 13th, 2017]
- Square 1 Burgers files bankruptcy, blames over-saturated restaurant market - Orlando Sentinel - June 13th, 2017 [June 13th, 2017]
- Big KC manufacturer files for bankruptcy - Kansas City Business Journal - June 13th, 2017 [June 13th, 2017]
- Canadians Have Been Refinancing To Delay Bankruptcy - Seeking Alpha - June 13th, 2017 [June 13th, 2017]
- Gymboree Files For Bankruptcy, Plans To Close At Least 375 Stores - Forbes - June 13th, 2017 [June 13th, 2017]
- Sears, J. Crew, Claire's Are Bankruptcy Risks (SHLD) | Investopedia - Investopedia - June 14th, 2017 [June 14th, 2017]
- Tampa's Square 1 Burgers files for bankruptcy protection - Tampabay.com - June 14th, 2017 [June 14th, 2017]
- RBI, Banks And NPAs - First, Reform India's Bankruptcy Code, Then Force Defaulters Into It - Forbes - June 14th, 2017 [June 14th, 2017]
- Retail bloodbath: Bankruptcy filings pile up - CNNMoney - June 14th, 2017 [June 14th, 2017]
- Bankruptcy cases show we've become a nation of selective justice - New York Daily News - June 14th, 2017 [June 14th, 2017]
- Soupman of 'Seinfeld' Soup Nazi fame files for bankruptcy protection - USA TODAY - June 14th, 2017 [June 14th, 2017]
- Strack & Van Til bankruptcy case moved to Illinois - nwitimes.com - June 16th, 2017 [June 16th, 2017]
- Lawsuit: Wells Fargo revised mortgages in bankruptcy without permission - USA TODAY - June 16th, 2017 [June 16th, 2017]
- France's CGG files for bankruptcy protection - MarketWatch - June 16th, 2017 [June 16th, 2017]
- 'Soup Nazi' company files for bankruptcy - CNNMoney - June 16th, 2017 [June 16th, 2017]
- France's CGG Group Files for Bankruptcy Protection - Wall Street Journal (subscription) - June 17th, 2017 [June 17th, 2017]
- Company of businessman behind polo facility expansion files for bankruptcy protection - Fauquier Times - June 17th, 2017 [June 17th, 2017]
- Vehicles involved in Dusty Old Cars bankruptcy to be auctioned - WMUR Manchester - June 17th, 2017 [June 17th, 2017]
- Could Illinois be the first state to file for bankruptcy? - CBS News - June 17th, 2017 [June 17th, 2017]
- Takata Said to Ready Bankruptcy Filing Ahead of Sale to Rival - New York Times - June 17th, 2017 [June 17th, 2017]
- Greece escapes brush with bankruptcy but austerity still bites - FRANCE 24 - June 17th, 2017 [June 17th, 2017]
- Pawnbroker A-OK cites embezzlement in multimillion-dollar bankruptcy - Wichita Eagle - June 18th, 2017 [June 18th, 2017]
- Clock is Ticking on India's Bad Bank Debts Under Bankruptcy Laws - Bloomberg - June 18th, 2017 [June 18th, 2017]
- Surveyor dealing with fine, bankruptcy - Muncie Star Press - June 18th, 2017 [June 18th, 2017]
- Mode Media Assets Acquired by Wedding Ad Network BrideClick in Bankruptcy Deal - Variety - June 18th, 2017 [June 18th, 2017]
- San Bernardino officially out of bankruptcy - San Bernardino County Sun - June 20th, 2017 [June 20th, 2017]
- 22 retailers that are at serious risk of bankruptcy - Chron.com - June 20th, 2017 [June 20th, 2017]
- What to expect in defective air bag maker Takata's looming bankruptcy - USA TODAY - June 20th, 2017 [June 20th, 2017]
- Could Illinois file for bankruptcy? - FOX Illinois - June 20th, 2017 [June 20th, 2017]
- Exploding airbags: Takata shares plummet 17% on bankruptcy reports - CNNMoney - June 20th, 2017 [June 20th, 2017]
- These 14 Stores May Be on the Brink of Bankruptcy | NBC Southern ... - NBC Southern California - June 21st, 2017 [June 21st, 2017]
- Medical bankruptcies - WEAR - June 21st, 2017 [June 21st, 2017]
- After five long years, San Bernardino is officially out of bankruptcy. What's next? - Los Angeles Times - June 21st, 2017 [June 21st, 2017]
- Takata to file for bankruptcy Monday, SMFG to provide bridge loan: sources - Reuters - June 22nd, 2017 [June 22nd, 2017]
- Sears Canada files for bankruptcy - CNNMoney - June 22nd, 2017 [June 22nd, 2017]
- Foundation Healthcare Chapter 11 Bankruptcy - Bankrupt Company News (press release) (blog) - June 23rd, 2017 [June 23rd, 2017]
- Implant Sciences Bankruptcy Objections Filed - Bankrupt Company News (press release) (blog) - June 23rd, 2017 [June 23rd, 2017]
- Puerto Rico Bankruptcy: Uncertainty, But Also Stock Profit Opportunity - Seeking Alpha - June 23rd, 2017 [June 23rd, 2017]
- Lakeland day care files for bankruptcy without paying workers - wreg.com - June 23rd, 2017 [June 23rd, 2017]
- Sears Canada Closing 59 Stores as It Seeks Bankruptcy Protection - Fortune - June 23rd, 2017 [June 23rd, 2017]
- Takata to file for bankruptcy Monday, SMBC to provide bridge loan: Sources - CNBC - June 23rd, 2017 [June 23rd, 2017]
- How Sears Canada's Bankruptcy Impacts Sears Holdings Corp. - Seeking Alpha - June 23rd, 2017 [June 23rd, 2017]
- Augusta native sworn in as newest Bankruptcy Court judge - The Augusta Chronicle - June 24th, 2017 [June 24th, 2017]
- Takata reportedly planning to file for bankruptcy - CNBC - June 24th, 2017 [June 24th, 2017]
- Bankruptcy - money_selfhelp - June 24th, 2017 [June 24th, 2017]
- Japan press - Takata expected to file for bankruptcy protection in Tokyo - ForexLive - June 26th, 2017 [June 26th, 2017]
- Bankruptcy guru Edward Altman sees similarities to 2007 in the credit market today - Yahoo Finance - June 26th, 2017 [June 26th, 2017]
- Takata's woes expected to continue beyond bankruptcy filing amid mounting recall costs - CNBC - June 26th, 2017 [June 26th, 2017]