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Obama Calls For Bankruptcy Law Reform

Says process should be improved for military, disaster victims

By Martin H. Bosworth
ConsumerAffairs.com

July 8, 2008

"I'll reform our bankruptcy laws to give Americans who find themselves trapped in debt a second chance," the Illinois senator told a crowd of 2,700 in Powder Springs, Georgia.

"While Americans should pay what they owe and we should be fair to those creditors who were fair to their borrowers, we also have to do more for the struggling families who need help the most," Obama added.

"[I]nstead of standing up to the big banks and credit card companies to strengthen our safety net, Washington has been helping them shred it. For too long, our bankruptcy laws have protected big banks and credit card companies instead of struggling families."

Obama's proposed reforms included a "fast track" process for service members and their families who have declared bankruptcy, exempting them from the "means test" instituted as part of the harsh new bankruptcy laws passed in 2005.

Under current law, anyone filing for Chapter 7 bankruptcy must undergo a "means test" to determine their actual income levels and expenses for qualification, regardless of circumstances. Those who did not qualify for Chapter 7 bankruptcy under the means test would be shifted to Chapter 13, where they would have to arrange a repayment plan of their debts with their creditors.

Obama said the "fast track" process would also eliminate "unnecessary paperwork" and the mandatory credit counseling requirement passed as part of the new laws.

The candidate also said that seniors filing for bankruptcy would get a minimum federal homestead exemption that would give them a better chance to keep their homes, and would streamline the filing process for victims of a natural disaster.

Obama used the proposed reforms as a way to delineate differences between him and his Republican opponent, Arizona senator John McCain. Obama said McCain "would continue the economic policies that would hobble families and our entire economy." McCain voted for the bankruptcy legislation, while Obama voted against it.

"While I was opposing the credit card industry's bankruptcy bill that made it harder for working families to climb out of debt, he was supporting it – and he even opposed helping families who were only in bankruptcy because of medical bills they couldn't pay," Obama said.

Congress' gift

The legislation was widely derided as a gift from Congress to the credit card and financial industries, blessing the banks and saddling consumers with tough new requirements and additional costs to filing for bankruptcy.

While the new laws initially caused a dramatic drop in filings after its becoming law in October 2005, the fallout from the housing crisis and general worsening of the economy has led to a steady uptick in filings over the last two years.

The new bankruptcy laws also proved a burden for victims of Hurricane Katrina, who ran up huge debts while trying to pay mortgages on houses that were damaged or destroyed as a result of the September 2005 storm. Congress refused to grant relief for victims of the hurricane who could not produce proof of their employment or credit histories due to the destruction. Eventually the Justice Department stepped in and waived some of the provisions temporarily.

Although Obama and McCain have been regularly sparring over the economy over the course of the campaign, Obama's speech today marked one of the few times the issue of bankruptcy took center stage.

Connecticut Senator and former presidential candidate Chris Dodd had also made reform of the bankruptcy laws a primary plank of his short-lived campaign, but the issue had been largely absent from the candidates' attention recently, supplanted by high gas prices and the foreclosure crisis.

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