Biden met with Warren this week in an effort to boost his income inequality credentials as he explores a presidential bid. Warren is the Democratic Party's standard-bearer on economic policy issues, and like many in his party, Biden is concerned that current frontrunner Hillary Clinton isn't a credible messenger for middle-class economics.
Warren hasn't endorsed any 2016 candidate. But 10 years ago, Biden was one of her most prominent adversaries on Capitol Hill. The pair clashed during the George W. Bush years over a Biden-backed bankruptcy bill, which Warren criticized as a naked effort to boost credit card company profits at the expense of struggling families. Biden ultimately won the legislative battle, but the consequences of the bill's passage have closely tracked to Warren's downbeat predictions.
Credit card lobbyists and other proponents of the bankruptcy reform Congress passed in 2005 said debtors were abusing the bankruptcy process by deliberately piling on debt they knew they couldn't repay, then stiffing their creditors by filing for bankruptcy protection. By filing for bankruptcy, households can have their debts discharged if they turn over many of their assets to creditors. It gives borrowers a chance to start over without heavy credit card debts, albeit with ruined credit.
The fight over the bankruptcy bill transformed Warren from a respected Harvard academic into a political force in Washington. She became the bill's most prominent critic, publishing influential research showing that roughly half of bankruptcy filers had been pushed to the brink by medical bills.
"One million men and women each year are turning to bankruptcy in the aftermath of a serious medical problem, and three-quarters of them have health insurance," Warren said in testimony before the Senate Judiciary Committee in February 2005. "A family with children is nearly three times more likely to file for bankruptcy than an individual or couple with no children."
Biden accused Warren of making a "mildly demagogic argument," but acknowledged that he didn't disagree with the facts she presented. Instead, he seized on the medical bills, asking why creditors like gas stations, car dealers and lawn service companies should have to foot the bill for people's health care costs. Notably, Biden didn't mention the plight of credit card issuers, which have long been a major employer in his home state of Delaware.
Listen to Warren's standoff with Biden in the podcast above. The exchange begins during the 44th minute.
"We have a broken health care finance system in the United States," Warren replied. "Until we fix the broken health care finance system, those families have to turn somewhere. And that means now, they turn as a last-ditch effort to the bankruptcy court."
"And that means that they turn to asking people that they borrowed money from to pay for their health care costs," Biden said. "Right? Isn't that literally correct?"
Warren said Biden was right to point out the health care industry was saddling the broader economy with very high costs. But she countered that the credit card industry was essentially pre-compensating itself for bankruptcies with big fees and high interest rates.
After a little more back-and-forth, Biden smiled. "You're very good, professor," he said, drawing laughter from many in the room.
The 2005 law was designed to make it both more difficult and less desirable for people to file for bankruptcy. It succeeded on both counts.
The average attorney fee consumers had to pay for a Chapter 7 bankruptcy went from $712 in early 2005 to $1,078 two years later, according to a June 2008 audit by the Government Accountability Office, an investigative arm of Congress. The number of bankruptcies, moreover, immediately declined dramatically. The law boosted profits for the credit industry, which didn't pass savings to consumers as the bill's proponents had promised.
This decline in the number of bankruptcy cases, of course, didn't reflect any improvement in household finances. Many financial experts believe that the bill exacerbated the foreclosure crisis that began inundating the country in 2007. Although residential mortgage debt can't be eliminated in bankruptcy, the inability for struggling households to discharge other debts made it harder for families to meet their mortgage payments after a job loss during the recession. In 2009, Warren published another study concluding that the percentage of bankruptcy filings attributable to medical bills had increased in the years following the legislation's passage.
Though Republicans provided most of the bill's support, Biden wasn't the only Democrat who joined them. And his potential presidential rival Hillary Clinton took a multiple-choice approach to bankruptcy legislation over the years. As first lady, she was an influential opponent of the legislation. As a senator in 2001, she supported it. The 2001 version of the bill did not pass, and Clinton did not cast a vote on the 2005 bill that did.