Sen. Elizabeth Warren (D-MA) was the first Democratic 2020 hopeful to take a direct swing at former Vice President Joe Biden since he got into the race, accusing him of being “on the side of the credit companies” in a fight that launched her political career a decade ago.

Warren’s quarrel with Biden isn’t personal. It’s about a 2005 bankruptcy bill he supported as a senator. Warren opposed the bill so vehemently that its passage inspired her transition from a Harvard bankruptcy law professor, who studied middle-class economics, to a senator and now a presidential hopeful.

“I got in that fight because [families] just didn’t have anyone and Joe Biden was on the side of the credit card companies,” Warren said after an April rally in Iowa. “It’s all a matter of public record.”

The bill made it harder for individuals to file for bankruptcy and get out of debt, a legal change that credit card companies and many major retailers had championed for years. The bill passed Congress with large majorities, but most Democratic senators, including Barack Obama, voted no. Biden voted yes and was widely seen at the time as one of the bill’s major Democratic champions.

To Warren, bankruptcy is fundamentally about bad luck rather than irresponsible behavior. The changes were mostly unnecessary additional burdens for struggling families that would enrich powerful special interests. Supporters of the changes, like Biden, believed that too many people were filing for bankruptcy — often people with more ability to repay their debts — a problem that was costly not just to creditors but to ordinary nonbankrupt consumers.

Warren drew two conclusions from the experience. First, she came to believe that the American economy requires a major structural overhaul to prevent the pressures that lead so many families to file for bankruptcy protection in the first place. Second, she concluded the American political system is broken, shaped too heavily by powerful business interests.

Biden, by contrast, saw the bill as an admittedly imperfect but fundamentally sound compromise that he improved by participating in crafting it. By cutting down on bankruptcies, the legislation helped not just credit card companies but also consumers who benefit from lower interest rates. The legislation contained provisions intended to protect low-income households and in part thanks to Biden’s work made some other changes that are favorable to the interests of divorced women and their children.

The Warren-Biden clash is also a window into a disagreement about the meaning of the current moment in Democratic Party politics. Warren wants to challenge a system she saw as fundamentally corrupt long before Trump arose, while Biden pitches a return to normalcy and the kind of politics in which compromise, horse trading, and home state interests are just part of the game.

Nobody’s going to cast their votes based on a 15-year-old revision to the bankruptcy code, but the argument Warren and Biden have been having over this legislation underscores the tensions driving the 2020 Democratic primary.

Personal bankruptcy, in general, explained

For much of Western history, the only way out from under crushing debt was debtor’s prison, where you’d be coerced into working off what you owed. This came to be seen as both inhumane and an ineffective way for creditors to actually recoup their money.

Under the modern system, if you’re in over your head in debt, you can file paperwork in bankruptcy court that shields you temporarily from your creditors. You end up needing to at least partially pay some of them back, but you emerge less indebted and able to move on with your life — albeit probably as someone who will have a harder time getting loans in the future.

The existence of these bankruptcy processes naturally makes lending a bit riskier than it otherwise would be. But it serves as a kind of insurance process to help deal with strokes of bad luck. It also creates incentives for consumers to borrow and lenders to lend. Consumers can seek loans whenever one would be convenient rather than merely in worst-case scenarios.

In other words, access to bankruptcy not only benefits specific debtors, it boosts the overall economy by both encouraging a robust financial system and ensuring that people who fail or experience bad luck can move on with their lives.

Bankruptcy in the United States comes in a few different forms. There are two kinds of business bankruptcy and a bankruptcy process for local government entities like towns, counties, and school districts (interestingly, there is no formal bankruptcy process for state governments). But the 2005 bankruptcy reform debate was fundamentally about personal bankruptcy, which comes in two flavors.

In a Chapter 7 personal bankruptcy you may have to sell off your stuff to pay what you can to your creditors (there are various rules about what kind of stuff you do and don’t need to sell), but when it’s done, you are free and clear. A Chapter 13 personal bankruptcy, by contrast, involves putting you on a payment plan in which some of your future income goes to your creditors.

In most cases, the bankrupt individual’s hard assets are worth much less than his debts, so it ends up being more favorable to file under Chapter 7. And over the course of the 1980s and 1990s, more and more people were in fact filing for bankruptcy — often under Chapter 7 — and the main thrust of reform was to try to clamp down on the steady growth of bankruptcy filings by pushing more people into Chapter 13.

What the bankruptcy bill changed

The details of the bankruptcy code are complicated, so the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) involved a long and complicated series of changes. Some of these new provisions were not especially controversial, including granting privileges to certain retirement plans and extending a process to fishers previously reserved for farmers. The bill also changed the prioritization of claims in bankruptcy, moving alimony and child support payments ahead of other creditors — a change that’s come to loom large in the political dialogue around the bill.

The main point of the legislation, however, was to address a belief by members of Congress that too many people were filing for bankruptcy and that this should be made harder to do. BAPCPA increased the amount of paperwork and fees that were required to file, while carving out an exemption for families earning less than 150 percent of the poverty line. Attorneys were made personally liable for inaccuracies in filings. Small businesses got some new compliance obligations, and a variety of changes were made to increase the amount of money that needs to be repaid under the Chapter 13 process.

At the same time, Congress moved to impose a means test on access to Chapter 7 bankruptcy — making it much harder for families with incomes over their state’s median to make a Chapter 7 filing. Simultaneously, they took the old rule that said you couldn't file for Chapter 7 if you’d done a previous Chapter 7 filing within the past six years and extended it to eight years.

They required that bankruptcy filers first undergo credit counseling and debtor education (a requirement of questionable value), made it somewhat more likely that you’d end up losing your home in bankruptcy, and curtailed the kinds of debts that can be forgiven in bankruptcy — notably making private student loans nondischargeable.

All told, the upshot of the bill was to make it significantly more difficult for individuals to walk away from debts with a Chapter 7 bankruptcy filing.

This was particularly significant for credit card companies because credit card debt is what’s known as “unsecured” debt. A home mortgage is backed by a house that the bank can foreclose on and seize. An auto loan is backed by a car. But a credit card is just a credit card. And if you use your credit card to buy food or medical procedures or other services, there’s nothing at all to sell off in a liquidation process. So credit card companies in particular wanted to cut down on Chapter 7 filings, and they got what they wanted.

The great bankruptcy debate

The fight about this became bitter both because of the depth of the disagreement and because it wound up playing out over a number of years.

Legislation aiming at the basic purpose of the bill was first introduced in 1998, passed the House in 1999, passed the Senate in slightly different form in 2000, and then a conference committee produced a compromise bill later that year. But then Bill Clinton somewhat unexpectedly vetoed the bill in December in one of his last acts in office.

Hillary Clinton claimed credit for turning the administration’s mind on this around in one of her memoirs and she discussed the issue at the time with Warren, after reading one of Warren’s op-eds opposing the legislation.

To Warren, bankruptcy filers generally aren’t trying to get out of debts racked up irresponsibly.

“Many people in bankruptcy were solid bill payers until something knocked their legs out from under them,” she told David Cay Johnston, while describing her research in 2000. “For two-thirds of these people, it was loss of a job, for 40 percent it was a serious medical problem and for 20 percent it was the economic fallout of divorce.”

Warren and her campaign team feel, fundamentally, that everything they warned about in this legislation has come to pass. She saw — and continues to see — easy access to bankruptcy as a critical de facto element of the social safety net in the United States. Absent the kind of anti-layoff regulations and universal health care that exist in Europe, the ability to discharge debts in bankruptcy was critical to middle-class families’ financial security.

The bill came back the next year with some new provisions, including the boost to divorced women’s priority in the bankruptcy line, and Hillary Clinton — now a senator — became a supporter. But the legislation got derailed by some fairly tangential controversies related to abortion.

By 2004-2005, however, the abortion issues were ironed out. Warren, still a professor rather than a politician, but an increasingly visible public critic of the proposed changes, memorably lacerated Clinton’s change of heart. She attributed the reversal entirely to Clinton’s status as a New York senator who counted Wall Street as her constituents.

The bankruptcy legislation swiftly became a synecdoche for a larger debate about the American economy. Nobody on either side could deny that the volume of bankruptcy filings had risen fairly dramatically. This, to proponents of the legislation, suggested that the process was being abused in a way that — yes — hurt credit card companies but more importantly hurt average Americans by forcing up the cost of credit.

Warren, in her book The Two-Income Trap, and on a blog called Warren Reports on the Middle Class, which she wrote with some collaborators, pushed a different view. Her argument was that structural shifts in American family and economic life had made middle-class finances more fragile, leading to a spike in bankruptcies induced by job losses or medical problems. She castigated the bill as exacerbating the middle-class squeeze and as being an example of a broken politics working for special interests rather than average Americans.

In her book, Warren singled-out Biden for criticism and slammed women’s groups like the NOW Legal Defense Fund for counting him as a key ally based on his Violence Against Women Act work.

Women’s groups have too few dollars and too little (wo)man power to fight every injustice. But there is another lesson in the tale of the bankruptcy bill. Women’s issues are not just about childbearing or domestic violence. If it were framed properly, middle-class economic reform just might become the issue that could galvanize millions of mainstream women to join the fight for women’s issues. The numbers are certainly there. This year, more women will file bankruptcy papers than will receive college diplomas. More women with children will search for a bankruptcy lawyer than will seek subsidized day care. And in a statistic with special significance for Senator Biden, more women will be victimized by predatory lenders than will seek protection from an abusive husband or boyfriend. The point is not to discredit other worthy causes or to pit one disadvantaged group against another nor would we suggest that battered women deserve less help or that subsidized day care is unimportant. The point is simply that family economics should not be left to giant corporations and paid lobbyists, and senators like Joe Biden should not be allowed to sell out women in the morning and be heralded as their friend in the evening. Middle-class women need help, and right now no one is putting their economic interests first.

Biden’s camp, needless to say, has a different view — seeing the 2005 legislation as an admittedly flawed effort to tackle a real problem that was made better thanks to the participation of Biden and other Democrats.

Joe Biden’s view of the bankruptcy bill

Biden was a strong proponent of bankruptcy curbs over the years, voting in favor of several earlier iterations of the bill as well as the 2005 legislation that eventually became law. He was a significant backer of the 2000 version of the legislation that Bill Clinton vetoed, using his authority as chair of the Senate Foreign Relations Committee to insert it into a foreign relations bill. The 2001 version of the bill advanced out of the Senate Judiciary Committee on a 10-8 vote, with Biden the only Democrat in favor.

Biden’s core argument, along with other proponents of the bill, was that overuse of bankruptcy made credit more expensive for everyone.

“Unnecessary and abusive bankruptcy hurts everyone,” Biden said in March 2001 after helping to scuttle some liberal amendments that might have derailed the bill. “This costs every single American consumer.’’

Biden’s campaign currently tempers its praise of the bill with a discussion of legislative strategy — arguing that a bankruptcy crackdown was inevitable in GOP-controlled Washington and that Biden’s work on the legislation made the bill better.

“Because it was a certainty that the Republican-controlled Congress and White House would turn the bankruptcy bill into law,” Biden spokesperson Andrew Bates said in a statement, “then-Senator Biden fought for and won important concessions for middle class families in it, including protecting access to Chapter 7 forgiveness for working people, making child support and alimony the number one priority for debt payments — in front of big banks and credit card companies — and forcing credit card companies to warn borrowers about their interest rates.”

The alimony change is also what Clinton cited as motivating her turnaround. And, indeed, the legislation attracted the strong support of the National Child Support Enforcement Association on precisely these grounds. Bumping the priority of child support and alimony payments ahead of other creditors would have been extremely difficult to achieve as a head-to-head battle of divorced moms versus bank lobbyists. But as a concession won by Democrats, it went through easily as part of a larger package.

In terms of protecting access to Chapter 7 for working people, what the bill did was exempt families with incomes below their state median from the new restrictions on the Chapter 7 process. The idea was this would protect the most vulnerable bankruptcy filers while still ensuring that higher-income families who really did have income to spare ended up repaying what they owed through a Chapter 13 process.

“The credit card and predatory lending industries were sharpening their knives and intent on making the bankruptcy reform law a windfall for themselves at the expense of working people,” Bates said in the statement. “The progressive changes that resulted from then-Senator Biden’s efforts blocked that from happening.”

Biden’s team seems to concede that one provision of the bill that was not heavily debated at the time but has become more salient since then — a rule that made private student loans (only about 10 percent of the market) nondischargeable in bankruptcy — was probably not a great idea. The campaign notes that what it refers to as the “Obama-Biden administration” formally recommended that Congress change this in 2015, that in 2016 the Department of Education took administrative action to grant student debt relief, and that earlier in their term they took a range of measures to try to help with student debt — ranging from the “gainful employment rule” to income-based repayments.

Fundamentally, however, whatever the details of legislative strategy, the point of the bill was to make it harder for people to discharge debts in bankruptcy. Biden’s view was that this was a good idea, and Warren’s was that it wasn’t.

What the bankruptcy bill did

The consumer bankruptcy rate rose from about 0.3 percent of households filing annually in the early 1980s to 1.5 percent of households doing so by the early 21st century.

BAPCPA was an effort to bring that rate down and a calculus that a lower rate of bankruptcies would offer benefits for both credit card companies and their customers. A study from Tal Gross, Raymond Kluender, Feng Liu, Matthew Notowidigdo, and Jialan Wang — economists at Boston University, MIT, the Consumer Financial Protection Bureau, Northwestern University, and the University of Illinois — shows that this basically worked.

There was a huge spike in bankruptcy filings right before the bill went into effect, followed by a measurable reduction in the number of filings — whether measured in absolute terms or relative to a simulated prediction.

The legislation, as designed, also successfully shifted a higher share of bankruptcy filings out of Chapter 7 and into Chapter 13 where unsecured creditors — mostly credit card companies — could recover more of their money.

That’s what the credit card companies wanted. But, critically, the new rules weren’t just a windfall for credit card companies. Now shouldering less default risk, credit card companies competed against each other to obtain customers and began to offer more favorable interest rates. Using a rich empirical data set of credit card offers, they calculate that a 1 percentage point reduction in bankruptcy filing risk generated a fall in interest rates of somewhere between 0.43 and 1.07 percentage points — meaning 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.

If this reduction in interest rates came about because of a reform that genuinely succeeded in targeting affluent debtors who were abusing the process, it would look like a huge vindication of the bill’s proponents. In reality, however, as best as the study’s authors can tell, the income-targeting failed.

Without data that lets them study the individual incomes of filing households, they instead used ZIP codes as a proxy and found that on a neighborhood level there was no change in the income distribution of bankruptcy filings. This may be the reason: Although low-income households were given a safe harbor from the restrictions on access to the Chapter 7 process, the increases in filing fees and paperwork hassle fall harder on low-income households.

What did happen was a substantial decline in the number of people able to file for bankruptcy in response to a medical emergency.

In short, proponents got what they wanted in terms of easier access to credit. But opponents got what they feared in terms of a reduction of the insurance value of bankruptcy as an option for families facing difficulties.

A separate study by Stefania Albanesi and Jaromir Nosal confirms that households locked out of bankruptcy by BAPCPA faced worse medium-term financial outcomes. A study by Adrien Auclert, Will Dobbie, and Paul Goldsmith-Pinkham suggests that the older, more generous access to bankruptcy might have helped the country bounce back faster from the Great Recession.

On a granular level, then, both sides of the Warren/Biden argument can claim that some of their main predictions came true, and both sides agree that the bill had at least some good provisions and some bad ones.

But the larger clash of worldviews is as vital as ever. Biden’s 2020 presidential bid explicitly front-loads Trump and his aberrant behavior, casting the former VP’s aspirations in explicitly restorationist terms — Biden will fix what Trump broke. To Warren, by contrast, the system was broken before she ever entered the Senate and the real fight is to overthrow the nexus of special interest politics that reigned in Washington back while The Apprentice was in its first season.