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.