ATLANTA (Reuters) - Democratic presidential candidate Barack Obama on Tuesday will propose overhauling bankruptcy laws to ease their impact on people unable to pay their bills because of medical expenses or military service.

"I'll reform our bankruptcy laws to give Americans who find themselves trapped in debt a second chance," Obama will say in prepared remarks for a town hall in Powder Springs, Georgia, which is outside of Atlanta.

"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 most," he added.

Obama, an Illinois senator, and Republican John McCain, an Arizona senator, have been squaring off this week over the economy as they court voters who are increasingly anxious over soaring energy costs and a deteriorating job market. McCain and Obama will face each other in the November election.

Obama took aim at a 2005 overhaul of bankruptcy laws that was strongly supported by credit card companies and other consumer lenders which made it tougher for people facing personal bankruptcy to discharge debt.

The bankruptcy law was passed by a Republican-led Congress and signed by President George W. Bush.

Obama has sought to link McCain to Bush's policies on the economy, which the Democratic candidate contends have left the middle class struggling while favoring the wealthy.

He accused McCain of having "sided with the big banks" to support the rewrite of the bankruptcy laws.

Obama said about half of all personal bankruptcies result in part from the burden of high medical expenses.

He said he would change the law so that Americans who can prove that their bankruptcies resulted from high medical costs could get some relief from their debts.

Obama would also create a "fast-track" bankruptcy process for people serving in the military and their families who get behind on expenses because of long deployments, repeated moves and predatory lenders.

"If you're serving our country, you should be protected no matter where you live," Obama said.

In addition, he would make it easier for people over 62 to keep their homes if they are facing bankruptcy and give some relief to people burdened by bills because of a natural disaster.

Amid worries the U.S. economy may be sinking into a recession, personal bankruptcy filings are on the rise.

Such filings jumped 30 percent in the first six months of this year compared to the same period in 2007, according to the American Bankruptcy Institute, a research organization.

Rising mortgage costs in a slumping housing market and high levels of other household debt led to the jump in bankruptcy filings, the institute said.

 

(Reuters) - Fresh credit fears swept global financial markets on Tuesday, pushing world stocks to their lowest levels since October 2006 as concerns intensified that the financial sector would have to raise more capital.

Banks tumbled across the board after a Lehman Brothers report said a pending accounting change could force Fannie Mae and Freddie Mac to raise an $46 billion and $29 billion respectively at a difficult time, knocking their shares to near 16-year lows on Monday.

In Britain, shares in troubled mortgage bank Bradford & Bingley fell 20 percent to record lows, below the price of its planned rights issue, due to concerns over its future.

Fresh worries over the financial sector dealt a blow to risky assets, which have been already reeling from fears about rising inflation due to high energy costs and slowing growth.

"The crisis in the financial system, given banks are the lubricant for the economy, points to continued tight credit," said Jonathan Lawlor, head of European research at Fox-Pitt, Kelton.

"So we have a loop where tight credit leads to slower economic growth, which leads to higher losses for the financial system, which leads to capital constraints for the banks."

MSCI main world equity index fell as low as 341.35, down 1 percent, hitting its lowest since October 2006.

The index is down 20 percent from its all-time peak set in November last year, plunging into bear market territory.

The FTSEurofirst 300 index fell 2.5 percent.

Wall Street was set for a weaker open with U.S. stock futures falling half a percent.

"The bottom line...is that the world does not look as healthy as place as it did three months ago," Barclays Wealth said in a note.

"Given that in reality central banks have not been sitting idly by -- but instead sounding more hawkish by the day -- they likely underestimate the true hits to GDP that are around the corner."

CONTAGIOUS CRISIS

On Wall Street, the S&P regional bank index fell 5 percent to record low on Monday, which Bank of Scotland said highlighted a key evolution in the unraveling of the 2001-2007 global credit boom.

"Initial focus was on structured products held and marketed by investment banks and the viability of structured investment vehicles. Focus going forward is likely to be on the scale of credit impairments delivered by a deteriorating economic cycle," the bank said in a note to clients.

"High levels of leverage extended to both consumers and investors against a now depreciating asset (housing) alongside lax lending standards make a rise in default rates... The epicenter of the crisis therefore shifts from investment to commercial bank balance sheets."

The yen -- which tends to rise in times of risk aversion given its low interest rates -- rose 0.3 percent to 106.83 yen per dollar.

Emerging stocks fell 1.7 percent to its lowest since January. Emerging sovereign spreads were steady.

European government bonds drew in safe-haven demand, however persistent concerns about inflation supported yields and kept a lid on prices. The September Bund future rose 6 ticks.

U.S. light crude fell 1.6 percent to $139.14 a barrel having dropped 2.7 percent on Monday. Gold fell to $918.75 an ounce.