Good, but Not Good Enough

For two years after college I worked as a research assistant at the Federal Reserve Bank of New York, where one of my main responsibilities was to help assemble a report that the Fed releases each quarter on the state of consumer finances in America. There is a graph in that report that shows the fraction of Americans who have recently declared personal bankruptcy, which spikes suddenly in late 2005 and then sharply drops. The first time I saw it I wondered whether I had somehow lived through a rapid economic boom and bust during my freshman year of high school without ever realizing it.

As I soon learned from a coworker, though, the surge and collapse in bankruptcies around that time was essentially artificial, the result of a federal law known as the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, which made it more difficult for individuals to get rid of debts in bankruptcy, and which led to a rush of filings just before the new rules went into effect.

Most Americans—or at least those fortunate enough never to have endured or witnessed someone else endure the ordeal of personal bankruptcy—have probably never heard of the BAPCPA. But in a sense it’s surprising that the law was not more widely talked about over the past year-and-a-half, when the country endured the ordeal of a Democratic primary campaign in which two candidates were also key players in the story of that law: then-Senator Joe Biden, and then-professor Elizabeth Warren. That the issue never came up at any of the eight primary debates at which the two shared a stage is somewhat astonishing.

The core objective of the law was to restrict who is eligible to declare a so-called “Chapter 7 bankruptcy,” which allows for debts to be written off once most of an individual’s assets have been sold and the proceeds applied to what they owe, and to steer more people into “Chapter 13 bankruptcy,” which allows one to keep more assets in exchange for agreeing to a repayment plan. Creditors generally prefer the latter because it allows them to extract more from debtors over time, which explains why credit-card companies and other lenders had aggressively lobbied for passage of the law, albeit under the banner of  “protecting consumers” from purported “abuse” by bad actors who were supposedly filing frivolous bankruptcies despite being perfectly able to repay their debts.

Biden, whose home state of Delaware is the de facto capital of the credit-card industry, voted for BAPCPA despite its being opposed by a majority of his Democratic colleagues in both the Senate and House, including then-Senator Barack Obama, and one independent, then-Representative Bernie Sanders. Harvard Law Professor Elizabeth Warren testified against the bill at a hearing before the Senate Judiciary Committee, of which Biden was a member at the time. Warren’s academic research had focused on the causes of personal bankruptcy, and she had concluded that, contrary to the financial industry’s narrative about pervasive fraud, one of the major drivers of bankruptcy was in fact unforeseen medical expenses. At that hearing, she got into a testy exchange with Biden, accusing him of trying to “take away the last shred of protection for a family” facing financial distress.

When Biden first announced his 2020 campaign, Warren raised the issue almost immediately. She declared in a statement that “Joe Biden was on the side of the credit-card companies” when BAPCPA was being drafted. In January, she even released one of her vaunted “plans” on the subject, proposing to reverse most of the 2005 law and replace the current dual-track system with a single, streamlined personal bankruptcy procedure.

Yet Warren never mentioned the issue on any of the occasions she faced Biden on the debate stage. It had nothing to do with the moderators not bringing it up; candidates are usually quite capable of talking about whatever they want regardless of what they are asked. Plus, Sanders called out Biden for his support of BAPCPA right away when they debated one-on-one on March 15. It’s one of the more notorious votes Biden has taken: Why not challenge him on it when you have the chance?

Current Affairs’s Nathan Robinson, among others, has speculated that Warren may have held back from attacking Biden too aggressively in order to preserve her leverage over him should he win the nomination. By holding her fire, she may have missed an opportunity to seriously weaken him, but she may have also kept alive the possibility of becoming his running mate or leading the staffing of his administration. This appeared to be her strategy in 2016 as well, though a leaked Hillary Clinton cabinet shortlist that included a number of corporate bigwigs suggests that it was not a terribly effective one. On the other hand, after Warren ended her campaign, Biden announced his support for her bankruptcy plan. Should we therefore count her long game a success?

I’m not so sure. On some level, the whole issue of bankruptcy reform is a sideshow. I say this as someone who would love to see Warren’s plan become law and who thinks Biden was on the wrong side of the debate in 2005. Making the system marginally more friendly to debtors is a morally worthwhile objective, especially because so many people who reach the point of needing to take advantage of it are pushed into their dire circumstances by forces beyond their control.

But making it easier to declare bankruptcy is like stocking a boat with plenty of life preservers while ignoring the leaks in the hull: a better idea than not doing anything, but not as good as dealing with the real problem. And the real problems are many: the high costs of education, childcare, and healthcare; the widespread lack of health insurance; stagnant wages; exorbitant interest rates on consumer loans.

Even taking Biden at his word and assuming that he has now reversed his views on personal bankruptcy, or that he would fight for a plan along the lines of Warren’s once in office, we have to wonder whether he would do enough to push for “big structural change” of the sort Warren claimed to be after. According to his own website, his healthcare plan would leave an estimated 3 percent of Americans uninsured. And as far as I can tell, he has never endorsed efforts to reinvigorate anti-usury law, such as those put forth by Sanders and Rep. Ocasio-Cortez, after state efforts to regulate interest rates on consumer loans were largely gutted by judicial decree several decades ago.

Interestingly enough, Biden himself emphasized the importance of tackling underlying causes at that hearing with Warren in 2005, though probably just as a way of distracting from the topic at hand. “Your problem with the credit-card companies is the usury rates,” he said. “It’s not about the bankruptcy bill.” When Warren countered that the bankruptcy laws shouldn’t be tampered with if Congress was unwilling to do anything about the usury laws, Biden paused. “You’re very good, professor,” he replied. If he becomes president, we will find out whether “good” is good enough.