Most of former Vice President Joe Biden’s recent public remarks have focused on the coronavirus pandemic, but he did take time ahead of the March 15 debate to address the topic of federal bankruptcy law, saying that he now endorses a bankruptcy reform plan that Sen. Elizabeth Warren rolled out in January.

There’s little sign that the American electorate is particularly interested in this subject. But to veteran Warren observers, it was a striking moment.

Bankruptcy was Warren’s main area of academic expertise before she became a public intellectual and then a politician. And her emergence into the public square was intimately related to a years-long argument about bankruptcy law in which her main antagonist inside the Democratic Party was none other than Joe Biden. Biden was a major proponent of a 2005 bankruptcy reform bill that was heavily supported by the credit card industry, a major industry in Biden’s home state of Delaware. Warren’s plan would have been rolled back the main provisions.

For him to adopt her view of the matter, in other words, is a major policy win for Warren on a topic that could not be nearer or dearer to her heart. It also seems like a thank you to her for staying aloof from the ongoing primary between Biden and Bernie Sanders, which represented a breakdown of a longstanding political alliance between Sanders and Warren — originally forged during the bankruptcy fight. Paired with the promise to select a woman as his running mate, it demonstrates a clear desire on Biden’s part to consolidate Warren supporters as part of his coalition.

It’s also part of a larger pattern in which Biden tends to shore up his progressive bona fides not by disavowing positions he took in the past — for the Iraq War, for example — but by denying that he ever took them. It’s a strategy that is obviously working for him on one level (he’s winning, after all) but will make it hard for him to win the support of progressive thought-leaders and activists who pay attention to the details.

The 2005 bankruptcy bill, explained

Bankruptcy is a legal process that allows a person or institution that can’t pay its bills to gain temporary protection from the people who he owes money to, lets those people get some of the money they are owed, and then lets the person proceed with life debt-free albeit likely with difficulty getting loans in the future. There are basically two kinds of personal bankruptcy in the United States of America (businesses, municipal governments, and other kinds of entities have their own flavors of bankruptcy), named Chapter 7 and Chapter 13 bankruptcy after the chapters in the bankruptcy code that describe them.

In a Chapter 7 bankruptcy you sell off your stuff to raise money (there are rules describing what kinds of stuff you don’t need to sell), give the money raised to your creditors, and then you are done.

In a Chapter 13 personal bankruptcy, you are put on a payment plan where a share of your future incomes is sent directly to your creditors.

In most cases, a 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. Credit card companies, in particular, were really bothered by Chapter 7 bankruptcies because a lot of the time people use their credit cards to make major purchases of things like vacations, weddings, or medical bills that can’t be sold or repossessed. They argued that the ability to escape from debts was being abused, forcing them to raise prices for everyone to compensate for scofflaws.

What the 2005 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.

That wasn’t an unintended consequence of the bill, it was the whole point. By making it harder to file for Chapter 7 bankruptcy the bill was supposed to make lending less risky, which was supposed to benefit the public by making banks and credit card issuers want to lend more freely.

Elizabeth Warren was a longtime opponent of these changes

The debate over the wisdom of doing this played out slowly. An early version of BAPCPA looked set to pass at the very end of Bill Clinton’s administration, he somewhat unexpectedly vetoed the bill in December 2000 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 at the time was a well-regard legal scholar but not a significant public figure. Her advocacy around the issue, however, became increasingly prominent as the proposal failed to go away. Early in the George W. Bush administration efforts to push the bill through congress got derailed by a somewhat tangential issue related to abortion, but after his reelection the proponents — mostly Republicans but also Biden — got their ducks in a row to make a big push to finally get changes made. Warren tapped the then-nascent blogosphere to try to elevate the issue’s profile and mobilize opposition, partnering with TPM’s Josh Marshall on a vertical dedicated to the bankruptcy issue.

Her work as an activist and advocate on the bankruptcy issue became central to her worldview.

The fundamental touchstone of Warren’s career was the realization that the technical expertise of bankruptcy law experts was not going to carry the day on this issue. The problem, in her view, was corruption — well-heeled special interests owned congress and members didn’t care what experts thought.

That was driven home for her in a searing way when Clinton, who as first lady had been sufficiently impressed by Warren’s work to persuade her husband to veto the bill, became a proponent once she was a senator from New York with ties to Wall Street. Warren also had to develop an alternative account of why bankruptcies were rising, which eventually became her book The Two-Income Trap, arguing that wage stagnation and inadequate social insurance had made the basic structure of the economy riskier for middle-class families.

Warren developed a reputation over the course of the campaign as a kind of lefty technocrat, the woman with a thousand plans, in contrast to Sanders’s more populist emphasis on mass mobilization. But to those of us who followed Warren’s work in the late-2000s, her takeaway was exactly the opposite of this — technical experts couldn’t win unless backed by a populist political movement and strong countervailing institutions like labor unions.

Biden is being slippery about his record

The bankruptcy bill never became a huge touchstone during the 2020 campaign even though it was a topic that pitted him not only against Warren but against Sanders (who was a House member at the time) and Barack Obama (who voted against the bill as a senator).

His team has, however, consistently made an argument that Biden echoed in the March 15 debate that he never supported large swathes of the bill but worked as a senator to improve the legislation.

“Because it was a certainty that the Republican-controlled Congress and White House would turn the bankruptcy bill into law,” Biden spokesperson Andrew Bates told me months ago when I began reporting on the issue, “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.”

In the debate, Biden offered the same argument.

“It was going to pass,” he said. “And I offered two amendments to make sure that people under $50,000 would not be affected and women and children would go to the front of the line on alimony and support payments. That’s what I did.”

It is true that Biden championed those changes to the bill that blunted its impact on the most vulnerable populations. Had Delaware been represented in the Senate by a Republican rather than by Biden, that senator would have been as attentive (if not more so) to industry interest in reducing Chapter 7 bankruptcies but less worried about low-income households and divorced women.

But it’s simply not the case that Biden was opposed to the main thrust of the bill or consistently involved in an effort to blunt its impact.

“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 believed that the increase in Chapter 7 filings was bad, that curbing filings was a good idea, and that while it made sense to incorporate some protections for the most vulnerable it was also important not to create so many exceptions as to vitiate the purpose of the legislation — a purpose he backed. His current rhetoric on this is reminiscent of the higher-profile controversy over his support for authorizing the use of military force against Iraq, where he now claims he never backed the Bush administration’s intent to invade when the record is pretty clear that he did.

Warren’s plan: a single, easy path to bankruptcy

In January, Warren rolled out a proposal to re-reform the personal bankruptcy process in a way that would largely undo Biden’s work. The core idea of this proposal, which Biden has now embraced, is to replace the Chapter 7 and 13 distinction with a single path to personal bankruptcy. She wants to make the filing process relatively streamlined — you disclose all your assets, debts, and income to the courts — to save people the arduous paperwork and often costly legal fees associated with the current system.

Then, according to her Medium post outlining the plan, filers would “choose from a menu of options for addressing their debts.”

In one option, you surrender all your property (with a few specific exemptions laid out in law) to your creditors and in exchange you walk away free and clear of all your debts.

Alternatively, there would be options for declaring bankruptcy on some debts (a home mortgage, for example) while simply committing to remain current on your other payments.

Last, a debtor would have the option of filing a proposed payment plan to discharge debts without surrendering assets, and then petition the court to accept that plan, halting collections to the extent needed to execute it.

This menu of options would be both faster and more user-friendly than the current system. It’s also much more generous in its treatment of people who may have racked up large debts without acquiring comparably large assets.

If you owe tens of thousands of dollars to your credit card company because you bought a bunch of jewelry, for example, then discharging the debt by surrendering your assets will still leave the credit card company with a bunch of valuable gold and diamonds. But if you owe tens of thousands of dollars primarily because you had medical expenses while simultaneously working less due to illness, then you won’t have many assets to surrender.

Under Warren’s plan, the debtor in either case would have a clear path to becoming debt-free; the same isn’t currently true because of how those structuring the 2005 reform saw both repayment and the accumulation of debt.

One of the big goals of the 2005 reform was to make it harder for people in that second scenario to wriggle out of debt. And from that priority arose the key question of how to characterize the impacted population — at the time (and now) Warren argued factors like medical emergencies and a threadbare social safety net were what led to overwhelming personal debt and bankruptcy. Lawmakers on the other side of the issue and their industry allies, however, saw irresponsible consumer behavior as the main issue.

Rather than simply roll back the 2005 changes and restore easy access to the Chapter 7 process, Warren now proposes creating a new unified process because she’s putting forth a bunch of other pro-debtor reforms.

Warren wants more debtor-friendly changes

Warren’s main idea is paired with a potpourri of tweaks to the existing rule:

Warren would end the current situation in which student loans are almost always non-dischargeable even in bankruptcy.

She would allow people who opt for a payment plan option to “spend a reasonable amount on toys and books and basic recreational activities for their kids during the bankruptcy process.”

Warren would allow bankruptcy filers who want to hold onto their car (perhaps they need it to go to work) to pay their auto lender cash equal to the current value of the car, rolling back a 2005 change that made them liable for the full value of the loan even if it exceeds the value of the car.

Warren would create a uniform federal “homestead” exemption for home equity rather than the current patchwork where some states are extremely stingy in what they allow while others allow rich debtors to shelter huge sums of money through real estate transactions.

Last but by no means least, Warren wants to create a standardized way to modify mortgages through the bankruptcy process, something that’s typically not allowed under current law.

Mortgage modification became a big deal during the 2008-’09 recession when many families in financial distress found themselves owing more on their home mortgages than their houses were currently worth. There was widespread political discussion on possible avenues for the federal government to create relief for so-called underwater homeowners. But they mostly didn’t happen, with Obama administration officials offering a variety of at-times-inconsistent explanations for why.

Under Warren’s plan, “if a foreclosure has started, and the homeowner certifies that she has attempted to negotiate a modification in good faith, she could seek an automatic modification of the mortgage debt to the market value of the property, with interest rates reduced to achieve a sustainable debt-to-income ratio.” In other words, the face value of the mortgage would be marked down to what the house is actually worth, with an interest rate then set at a level the borrower can afford.

Warren — and now Biden — would very partially offset this set of debtor-friendly changes with a crackdown on the “millionaires loophole” that rich people use to shelter assets from bankruptcy by placing assets in trusts that name themselves as the beneficiary. This would lead creditors to recoup more from the wealthiest debtors, even as they have a harder time collecting from the middle class. Biden’s decision to embrace Warren’s plan naturally reeks of political opportunism. But it would also be fair to say that we now have empirical data on the impact of reform, and it’s mostly bad news.

The consequences of bankruptcy reform

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 fundamentally, the legislation harmed vulnerable populations and made the economy less resilient to recessions while in the wake of the financial crisis the idea of centering economic policy around the idea of expanding cheap credit to more people does not look very attractive.

Can Biden unify the Democratic Party?

The significance of this story to Warren’s narrative about her own political trajectory is one reason Sanders supporters have been so frustrated by her reluctance to endorse Sanders as part of a last-ditch effort to block a Biden nomination. The former vice president is very literally the central Democratic Party villain in her own official account of why she got involved in politics, so to stand aside and let him secure the nomination when his opponent is someone with whom she has only minor policy disagreements seems outrageous.

At the same time, politics ain’t beanbag.

Sanders’s odds of winning the nomination are extremely low no matter what Warren does, and while Biden was certainly Warren’s antagonist on bankruptcy everyone with an adult understanding of politics sees that this was a question of Delaware home state stuff rather than ideological fanaticism on his part.

Biden is a very old-fashioned transactional politician, and if he’s willing to endorse her proposal on her signature issue in exchange for neutrality then that seems like a good deal to take. The biggest question facing Warren’s team at this point isn’t who will win the nomination, it’s how can they best position themselves to wield influence in a Biden administration — perhaps even securing the vice presidency — now that primary polling and ailing economy make one look likely.

But even as Biden is taking dramatic steps to unify the Democratic Party, this whole saga is a case study in why it’ll be difficult. He can shift his policy positions in favor of more progressive stances, and that will win him the affection of people like Warren who are very into policy details. But Biden’s big problem isn’t progressive policy wonks, it’s 20-something Sanders voters who have low propensity to vote and whose thinking about politics is heavily influenced by pro-Sanders media figures who are extremely hostile to the institutional Democratic Party.

Many of these figures aren’t very interested in transactional politics or concrete policy concessions, and their fundamental critique of mainstream Democratic Party politicians is that they are bad people who can’t be trusted. Warren can say nice things about Biden’s agenda, but she can’t retract the core claim that Biden was an instrumental actor in a corrupt legislative process that screwed the middle class on behalf of the wealthy and powerful.

To people disinclined to trust mainstream politicians, Sanders is a rare hero. It’s very hard for someone with decades of experience exhibiting both the flaws and the virtues of mainstream politics to gain the trust and confidence that Sanders has won. The horse-trading that seems to have led Biden to reverse himself on bankruptcy doesn’t change that.