Obama Takes on Bankruptcy

Talk about stepping straight into the muck: Democratic presidential candidate Barack Obama is taking on the bankruptcy system. Obama unveiled some of his ideas on Tuesday, calling for changes to ease bankruptcy laws for disaster victims, elderly homeowners, military families, and people overwhelmed by medical bills. The changes would help people in certain dire circumstances to hang on to their homes during bankruptcy. Of course, the mere mention of "bankruptcy" causes a frenzy among conservatives, who went all out in 2005 to support the lender-supported law that made it harder for people to get rid of their debts through bankruptcy. Obama opposed the measure; his likely opponent, Rep. Sen. John McCain, supported it. Even as Obama was delivering Tuesday’s speech, McCain’s staff issued a statement saying that 18 Democrats supported the 2005 law and that Obama was illustrating his rigid partisanship by not joining them.

That makes no sense, of course, but it’s also the usual back-and-forth bickering of a campaign. At creditslips.org, bankruptcy Elizabeth Warren says that Obama is probably the first presidential candidate to make bankruptcy a campaign issue, and outlines the reasons why most have steered clear:

It is very technical (hard to wedge into a sound bite). It is depressing (no one wants to think about going bankrupt). It will annoy big-money interests (financial services gave big money to pass the current bankruptcy laws). Savvy handlers would advise against it. So why would a presidential candidate make bankruptcy relief a visible part of his platform?

Well, probably because a lot has changed since 2005, a time when Rep. Sen. Charles Grassley, R-Iowa, explained his backing of tougher bankruptcy laws by saying "Americans have had enough. They are tired of paying for high rollers who game the current system." He was referring to consumers and irresponsible borrowers back then; you could substitute "lenders" for "high rollers" today, and everyone would know what that means – a sign of how much the subprime meltdown has changed the way people view the financial system.

As Warren points out, Obama’s past opposition to bankrupty reform has positioned him perfectly to make bankruptcy a strong issue for him. After Katrina, McCain even opposed easing laws for victims of natural disasters. From Warren:

The deteriorating economy makes bankruptcy a more urgent national issue. Bankruptcy and consumer finance are issues where the money and power is all on one side and the middle class families are on the other. It is also an area where both candidates have an on-the-record history. Senator Obama has now thrust bankruptcy issue into the national spotlight.

Well, for good and bad. I covered bankruptcy for years, back when lenders let people use credit cards for gambling on Mississippi riverboat casinos and put credit cards back into the hands of debtors almost immediately after they filed for bankruptcy. I had long ago given up hope that lenders ever would be called to account for their parts in the bankruptcy mess, but that was before the subprime crisis opened a window into how predatory lending works. Warren may be right that Obama is raising the bankruptcy profile at a time when people are more aware of the way the financial system works and more sympathetic to borrowers in trouble. But this one’s not a slam dunk. People who pay their bills on time aren’t always open to lending a hand to those who don’t, and the financial industry continues to shower Congress with money to get what it wants. Credit card companies just don’t go away, either; they figure out how to fend off any limits on their practices. So full credit goes to Obama for even taking up this issue. I’m wondering just how far he’ll really get with it.