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UPDATE 1-White House contender Warren, drawing on academic background, proposes bankruptcy reform

Joseph Ax

proposes bankruptcy reform@ (Adds statement from Biden campaign)

NEW YORK, Jan 7 (Reuters) - Democratic presidential contender Elizabeth Warren on Tuesday proposed making it easier for struggling American families to wipe away their debts by reforming the country's personal bankruptcy laws.

The issue is of particular importance to Warren, a former law professor at Harvard University who spent decades studying why individuals and families file for bankruptcy in the United States.

Warren's plan calls for repealing much of a 2005 law that was backed by, among others, then-U.S. Senator Joe Biden, now one of Warren's chief rivals for the Democratic presidential nomination. The legislation, which passed largely with Republican support and was favored by credit card companies, made it more difficult for individuals to clear debts through bankruptcy filings.

Warren and Biden have been sparring over the issue for two decades, starting when Biden still represented Delaware whose corporation-friendly laws have made it a haven for many financial companies and Warren was a nationally recognized bankruptcy law expert.

Warren, now a U.S. senator from Massachusetts, argued that her research showed most families go bankrupt not because of financial misbehavior but because of events out of their control: a lost job, a medical problem or a divorce.

But proponents of the bill at the time said it was needed to slow the pace of bankruptcies because too many people financially able to repay their debts were instead filing for bankruptcy.

In the spring, after Biden launched his campaign, Warren accused him of siding with credit card companies over families.

In response, the Biden campaign said the 2005 legislation was inevitable, given that Republicans held the White House and controlled Congress, and that Biden worked to add protections to the bill for working families and women, including making child support and alimony the top priority for payments rather than credit card bills and other debt.

Warren and Biden are two of the front-runners among the 14 Democrats vying to take on Republican President Donald Trump in the November 2020 election.

When families file for bankruptcy, they can either do so under Chapter 7, which allows them to sell off assets and clear debts permanently, or Chapter 13, which allows them to keep their property but requires them to use a portion of their income for years to make debt payments.

Warren's plan, published on the website Medium, would streamline bankruptcy law by creating a single process and offering families far more flexibility in deciding how to discharge their debts.

She would allow families in bankruptcy to set aside more money for basic needs, including rent and child care, and to avoid onerous legal fees.

The 2005 bill also made it difficult to discharge student debt via bankruptcy, Warren said. The senator, who has also called for using higher taxes on the wealthy to erase student debt for millions of people, said she would reform the law to treat student debt like any other consumer debt in bankruptcy court.

Warren said the legislation resulted in fewer bankruptcies and more insolvencies and caused hundreds of thousands of additional mortgage defaults and foreclosures in the wake of the 2008 recession.

"The banking industry spent more than $100 million to turn that bill into a law because they knew it would be worth much more than that to their bottom lines," Warren wrote. "But it was terrible for families in need." (Reporting by Joseph Ax; Editing by Tom Brown and Jonathan Oatis)