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Can a Campaign Go Bankrupt?What happens to Hillary Clinton's debt when the primaries are over?

By Jacob Leibenluft
Posted Wednesday, May 7, 2008, at 6:40 PM ET
Hillary Clinton. Click image to expand.

Sen. Hillary Clinton has lent her campaign another $6.4 million since April 1, a staffer confirmed on Wednesday. The Clinton campaign began last month with $10.3 million in unpaid bills to everyone from political consultants to caterers. If a candidate borrows money during the course of a campaign, what happens to all that debt when she drops out or the election's over?

It needs to be paid back—unless the candidate is the one owed the money. Lenders want their money back, and they are expected to follow the same practices they would if they were lending to a business or an individual. (If Clinton had borrowed from a bank, for example, she would be required to pay interest on the loans.) Moreover, under campaign finance law, an uncollected loan from a corporation—whether it's a bank or a sign maker—could be construed as an illegal contribution. As a result, even though vendors don't always require campaigns to pay upfront, they must make a good-faith effort to collect on any money they might be owed.

To pay back those loans, a candidate is forced to do exactly the thing she wasn't able to accomplish during the course of the campaign—raise more money. As long as someone hasn't already given the maximum legal contribution for a given campaign, he or she can—subject to the same campaign finance rules—donate to the effort to pay off debts even after Election Day has come and gone. The long-dead presidential campaigns of Chris Dodd, Bill Richardson, and Rudy Giuliani all have active Web sites inviting contributions to the former candidates' debt-retirement efforts—as long as you haven't donated $2,300 already. For candidates who run for office again, campaign debts can roll over to the next campaign cycle—depending, of course, on the terms of their loans. In perhaps the most famous case of outstanding campaign debt, former Ohio Sen. John Glenn remained nearly $3 million in the hole for more than 20 years after a failed bid for the presidency in 1984. (The Federal Election Commission granted him a reprieve two years ago.)

Debt retirement gets a little more complicated when candidates lend their own money to their campaign. After an election is over, any campaign contributions that go toward repaying the candidate's own loans serve, in practice, as money directly into a politician's pocket. As a result, campaign law (PDF) now limits to $250,000 the amount a campaign committee can repay the candidate after the election. In the case of the Democratic primary, the election will end when a nominee is selected in Denver. So unless Clinton is able to raise enough money to pay herself back by then, she'll have to write off millions of dollars she lent to her campaign.

What happens when a candidate has no hope of raising enough money after the election to pay off his or her outstanding debts? Technically, political committees can declare bankruptcy, but the practice is almost unheard of since defunct campaigns don't have much in the way of assets. Instead, losing candidates who aren't running again for political office—and consequently don't have an easy way to raise much money—may go through a process with the FEC called "debt settlement" (PDF). To do so, a former candidate must agree with creditors on how much he or she will pay back, and the FEC must verify that each creditor extended the debt in the "ordinary course of business" and tried its best to collect. (Unlike outstanding payments to vendors or staff, bank loans typically can't be forgiven.) If debt settlement fails, the FEC can eventually engage in an "administrative termination" that shuts down the campaign committee and cancels its obligations.

Got a question about today's news? Ask the Explainer.

Explainer thanks Jan Baran of Wiley Rein; Joseph Birkenstock of Caplin & Drysdale; and Paul Ryan of the Campaign Legal Center.

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Jacob Leibenluft is a writer from Washington, D.C.
Photograph of Hillary Clinton by Joe Raedle/Getty Images.
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