From In the Red
http://www.rightonthemoney.org/

Chris: So are you ready to talk a little bit about bankruptcy?

Robin: I'll talk about anything you want.

Chris: Let me ask you the basic, bottom-line question. Should Robin and Paul declare bankruptcy?

Robin: No.

Chris: Why not?

Robin: Most of the debt they have would not be discharged or --

Chris: Let me ask you the basic question. Should Robin and Paul declare bankruptcy?

Robin: No.

Chris: Why not?

Robin: Because most of their debt can not be eliminated in bankruptcy.

Chris: Explain.

Robin: Their debt is primarily student loans. They have about $130,000 in student loan debt. In 1998 Congress amended the bankruptcy act and effectively eliminated bankruptcy as a way to get rid of student loans. There's only one situation now which you can eliminate student loans in bankruptcy, and that is if repaying those loans would be what's called an undue hardship. To meet that standard usually it's someone who is not able to work because of a disability, or has a child with extraordinary medical expenses. I mean, it's the kind of person who may himself or herself be on disability or have a dependent on disability.

Chris: For the catastrophic situation?

Robin: Exactly. Here you're talking about two young, healthy working adults with a child in good health. A bankruptcy court is not going to allow them to eliminate those student loans in the bankruptcy. They've also got a home loan and a second on their house. If they want to keep their, house they're going to have to keep those obligations. And so bankruptcy would, in fact, help them eliminate their credit card debt, which is about $30,000.

Chris: Yeah.

Robin: If getting rid of that $30,000 would give them sufficient extra cash each month to put towards their other debts and that's the breathing room they need, then maybe bankruptcy would make sense for them. But it's certainly not going to be the kind of grandiose solution that they're looking for. It's really only going to make a very small dent in their financial problem situation.

Chris: What about going to a consumer credit counseling service.

Robin: Part of the problem with going to a consumer credit counseling service is that many of those agencies don't deal with student loans. The way those agencies are set up, they receive many that funds those agencies by creditors participating in paying a percentage back to the agency.

For some people it presents a conflict of interest. The work I've done with consumer credit counseling, I think they're all very good, they provide the information that they need, they give good advice and information. But they don't get payments back from the government. You know, if you have a tax debt, a student loan, a small business administration loan, many consumer credit counseling agencies, or even some of the other ones that now, there are lots of others, nonprofit debt counseling agencies, most of them don't deal with government loans because the government isn't going to be giving them a percentage back to fund their office. They're dealing mostly with banks, credit cards, mortgage loans, those kinds of things. So, again, they're not going to have the bulk of their debt addressed by that as one of the solutions to their problems or an avenue to pursue with their problem.

Chris: So what would you recommend for Robin and Paul to do to start addressing this huge debt burden they have? Because this is a huge debt burden.

Robin: Yeah. And they've got to break it down, I think, into the component parts when you're looking primarily at housing debt, student loan debt, and credit card debt.

Chris: Let's start out with the student loan debt.

Robin: The student loan debt is a monster. But there are certain things that they can look into. I think they said something along the lines that Paul has got 15 different loans.

Chris: Exactly.

Robin: He probably can be looking in to consolidating those loans, seeing if he can bring down the interest rate on those loans, and possibly stretching his payment plan out. There are different payment schedules now available for student loans that go up to 30 years. Truly it looks like a mortgage. But if you've got $100,000 in student loan debt, a mortgage type payment may make the most sense for you rather than trying to pay it off in ten years or fifteen years and being strapped by this huge payment each month.

I would suggest them not consolidate Robin's loan and Paul's loans together. In some scenarios husbands and wives are permitted to consolidate their student loans together. You know, in an ideal world where everyone stays married for the rest of their lives, that makes sense. In a world where divorce happens, people split up, they go separate ways, you would essentially be saddling her with his student loan debt by doing that. Granted, they were together as a couple, although I don't think they were married when he was in medical school. Which means it's, basically, his separate debt. It's not something that she's legally obligated to repay. Hers is more probably more of a marital debt in that they were married when she went to school.

Chris: Should she think about stretching out the terms of her loan?

Robin: Maybe, maybe not. Quite frankly, I think she needs to be working full-time and bringing in a bigger income into the family. I know, you know, a lot of times a physician feels I should be able to support my family and we should be able to make it on my income. They have an extraordinary amount of debt. And her choosing a field that doesn't pay high and -- I think she's looking to go back to work. She said she was going to get some computer training. You know, I hope she can feel better about herself in doing it. If she needs to be pulling in an income that's sufficient to be putting towards the household bills.

Chris: What about the first mortgage and the second mortgage, all the loans that they have that are tied to their home?

Robin: I'm surprised -- given it seems like their second mortgage came fairly recently, I was sort of surprised that they didn't refinance their first and take out enough essentially to cover the cost of the extension on their house. Again, I would look in to seeing if there was any way to consolidate those loans. Mortgage rates are still somewhat low. They're not as low as they had been, but they're still somewhat low. It seems to me that looking to work with a mortgage broker, somebody who has a lot of different mortgages available to him or her, often works with banks -- you know, you're not going to -- if you open your newspaper, their not going to be available to the ordinary consumer, you've got to work with a broker.

And even though their credit isn't the best and, you know, they couldn't get a car loan, nevertheless, mortgage brokers have a lot of tools at their disposal and will tell you that home loans are very secure and that they usually can qualify somebody for a home loan as long as they can make the monthly payments. And so I would certainly very much suggest that they talk to a mortgage broker about consolidating that debt, trying to see where they are with interest rates, if they can bring it down.

They didn't talk about the type of mortgage they have. I don't know if they've tried to, if they have like a shorter term mortgage, maybe they have a 20 or 25 year mortgage, again, they should certainly be expanding that out to 30 years to try and bring down the monthly payments.

Chris: Buy themselves some time?

Robin: Exactly. They need time. They need lower payments right now. And that may not be what they want to do ultimately in the long run. And until his medical practice builds up and he really has a much bigger income coming in, stretching outs their payments now makes more sense. And then they have more income coming in, they can start paying down their debt more quickly.

Chris: $30,000 in credit card debt, that's a big chunk of money.

Robin: It is. And, you know, bankruptcy could address that problem. So could a consumer credit counseling service or Debt Counselors of America or another nonprofit agency, that makes sense. You know, most Americans are also getting inundated with credit card offers usually at extremely low interest rates, even if it's only for six or seven months. And they should very carefully pay attention to those offers that are coming in. And they can play the balance transfer game and try and keep it on it, you know, six months on a card with a very low interest rate, and then turn to the next one and the next one. You know, I think this is one area where most of us ought to be taking advantage. Those of us who carry balances ought to be taking advantages of those offers that come in the mail. That in combination with perhaps a counseling agency and working, trying some kind of a workout with the creditors.

Chris: They have a lot of late payments, so I think their credit is probably a little bit impaired. What should they do about that?

Robin: Well, one of the things I think that would help them a lot is if they were to sit down and put a stack of all of their monthly obligations, particularly the ones that are either fixed, the same amount every month like their mortgage payment, or somewhat predictable, you know, their phone bill is probably within a range each month. And then call each one of those creditors and basically say is there a way that we can set up an automatic deduction on our checking account and each month our mortgage is just going to be automatically deducted? And sometimes you can get actually a reduction in interest rate if you do that on a mortgage. If they find a way to get a car loan, do the same thing with the car. The phone bill, the electric bill, the gas bill, all of those.

Chris: They're all big companies, they all have the same kind of network.

Robin: Exactly. There are very few creditors who are unable to make that arrangements with banks these days. They could probably get it down to where they're making, writing out maybe three checks a month on their bills. And what they would probably want to leave to themselves would be their credit cards. Because those are going to be -- the amount that they pay each month on their credit cards will vary depending on how much disposable income they have, you know, how much they feel they can put towards it.

So those are the ones they would probably want to keep to themselves. But all the rest of them they can probably just eliminate the need to write that monthly check. And instead what will happen is the phone bill will come home, it will have the amount that was deducted from their checking account, or maybe it will say on such and such a date the following amount will be deducted from your checking account. And then they'll know how much has been taken from the checking account, but they won't have to bother with the writing of checks themselves. That will at least help to eliminate future late payments on their credit report.

The ones that are in past there's not much they can do to eliminate them, it's just a matter of time. But if they can at least minimize future late payments and just begin to get a showing of payment of a consistent payment history and an on-time payment history in the future, eventually their creditors will focus on the on-time payments and the late payments will have less of an impact.

Chris: With your experience is their situation hopeless with this debt?

Robin: No, it's not hopeless. My god, the guy is a doctor, you know. They need to take a hard and fast look at their situation. And they need to get a handle on what their, where their money comes from and goes. I think part of the problem is they're clueless about where they spend their money. They think they spend it on organic vegetables, but they're not sure; but they know they do, but they don't know how much.

I can understand them not wanting to sit down at a computer every night and doing some elaborate budgeting. I would suggest that they carry a piece of paper in their pocket, and for about a month each time either one of them spends any money just jot it down, the date, how much they spent, and what they spend it on. And at the end of the month they can come together and look at where all of their money is going, their cash, their ATM, where they're writing checks. And they can just get a handle and get a sense of the flow of their money. Because I just don't think they know what that is. And until they understand what they're spending their money on and how much on an average each month their spending, until they understand that, they can't start making the kinds of lifestyle changes that really need to make. But they -- I know they said that they're living as tight as they can. I'll bet you there are places where they can tighten up more. There are ways to use, to use public libraries.

Chris: Right. You don't have to go to a book store.

Robin: Exactly. I think they talk about CDs, that they like to buy music. You know, most good libraries allow you to borrow music, you can borrow the CDs there. And that's the kind of thing that they really need to recognize that they're in some ways -- I don't want to use a judgmental word. They're wasting their money where they could be paying down their debt and living more frugally.

Chris: And they can get out of this situation?

Robin: They can.

Chris: It's not the rest of their life.

Robin: That's right. And truly with options with the Department of Education and other private lenders, they really have ways to try and get a handle on their student loan debt. They can also look into some of the different ways of loan cancellation. I know that they had talked about working on an Indian reservation to reducing the medical debt.

There are some smaller programs. If Robin wants to, for example, can not be working full-time, there is like the Americorp program where you can do some part-time work in a community and have part of your student loan paid back up to about $5,000 a year. She may not have to leave Boulder to do that. But if she is not quite working in art therapy and doing what she wants to be doing, she may be able to be doing something in her community and getting some of the student loan paid down that way.

Chris: I think a lot of people would echo Robin's feelings that bankruptcy just, it's a way of getting rid of all these restraints. I mean, all this debt is just restraining, it's putting limits. If I just get bankruptcy, I've got a clean slate. What can bankruptcy really do for somebody?

Robin: Well, for somebody who's got debt that is eligible to be eliminate at bankruptcy, it does exactly that. It wipes the slate clean, gives you a fresh start, gets start of the shackles off of you. And it's very, very freeing for people. If you've been avoiding your phone calls, avoiding your mail, saddled with debt, you're not able to sleep at night, the anxiety level is high very high, bankruptcy really is a tremendous relief.

But you've got to have debt that can be eliminated at bankruptcy. And with the bulk of their debt being student loans, it's just not an option for them.

Chris: So what debt can be discharged in bankruptcy?

Robin: Most -- well, let's divide that into two categories, secured and unsecured. And unsecured debt is debt that's not tied to any particular property. Secured debt is tied to property, like a mortgage, or a second mortgage, or most car loans where if you don't make the payment the creditor can come in and take the property.

Chris: Or the repo man comes to drive your car away.

Robin: That's right. Or there's foreclosure on your house, that's secure debt. Most unsecured debt can be eliminated in bankruptcy. And there are a few exceptions. The most notable ones are student loans, child support and alimony, and income tax debts. It's pretty complicated with income taxes. Older debts usually can be eliminated in bankruptcy. Newer tax debts can't be new as in within the previous three years or so.

There are some other debts related to drunk driving and other minor categories, smaller categories that can not be eliminated in bankruptcy. But for most people who have credit card debts, maybe have hospital bills or medical bills, those kind of the bulk of people's debt can be wiped out in bankruptcy. And that's what most people do bankruptcy for.

There are some ways to restructure some of that secured debt, if you're creditor is willing to work with you in bankruptcy to do that. Usually not the home loan. The home loan either stays as is or is eliminated completely because you're willing to let go of the house. But sometimes you can restructure sometimes the car loan or other secure debt. And I'm talking here about Chapter 7 liquidation, straight wipe out the debt in bankruptcy.

There is also Chapter 13 which is a repayment bankruptcy. And in that kind of a --

Chris: A wage earners' bankruptcy?

Robin: A wage earner. Yes, you're showing your age. That's what it was called back in time '70s. But, yes. For people who have some source of steady income, and it doesn't have to be wages, now it can be the receipts of an independent contractor, all kinds of creative ways that you can fund a Chapter 13 plan. But, essentially, what you're doing is saying to the court I can't repay all my debt at once now. But I'm going to propose this plan to you in which I hope to repay the bulk, if not all, of my debt within three to five years.

Chapter 13 is primarily used in three situations. One would be somebody who is in arrears on their mortgage. They feel behind in their mortgage, the lending company is threatening to foreclose. They want to save the house, and they think they can make up the missed payments and get back on track with their payments.

In Chapter 7 they're going to let the foreclosure go through and take the house. In Chapter 13 you can get back on track, make up the arrears in your plan and stay on track with your payments. The second most common reason people file for Chapter 13 is when they have a large income tax debt that they can't afford to repay outside of bankruptcy. The interest continues to accrue, it goes up and up and up. And so Chapter 13 allows the debtor to essentially impose a repayment plan on the IRS, and interest stops a accruing. While you're in bankruptcy, your creditors can't tack on any more fees or interest or anything like that.

I have a feeling that fewer people are using bankruptcy for tax debt these days because the IRS is becoming sort of the nice agency.

Chris: Right.

Robin: I mean, I know tax lawyers who are going out of business, literally closing their doors and looking for another area to practice. Because people can deal with the IRS on their own now.

Chris: Yeah. And they've decided they'd rather be paid than be hard?

Robin: Exactly. The IRS though I have to say is one the nicest creditors in bankruptcy. And if somebody does file to deal with a tax debt in bankruptcy, the IRS pretty much doesn't, never objects to a plan. As long as they're getting paid through the bankruptcy, they're fine about it.

The third category of people who file are those who have other debts that can't be eliminated in Chapter 7, and so they're going to use Chapter 13 to repay it. Now, you might think about a student loan fitting in to that category. The situation, however, is that a Chapter 13 lasts three to five years. There's just no way that they are going to pay off their student loan in three to five years. So all they would effectively do is pay off part of it, stop the accrual of the interest during the period that they're making the payments, but it gets tacked on anyway. And everything that was abated during the Chapter 13 bankruptcy gets tacked on, because they come out of the bankruptcy still owing a debt. So it really doesn't do much for people with student loans anymore.

Chapter 13 is also attractive to people who have property, valuable property that might get taken away from them in Chapter 7. Chapter 7 is sort of a -- the deal is, yeah, you get your debts wiped out. But if you have property that's called nonexempt, meaning that it doesn't fall into this list that your state has designated as what you get to keep if you go bankrupt, if you have any of that property, the bankruptcy, a person called the trustee who was appointed by the court to oversee your case, that person gets to take your property, liquidate it, sell it, and then use the proceeds to pay off your creditors. Now, the truth is about 90 percent of the Chapter 7 cases filed in the United States by individual people going bankrupt are what we call no asset cases, there are no assets liquidated for the creditors. But there clearly are people who have assets. And they choose 13 to avoid getting the assets taken away from them.

If you own -- in any place where you own any kind of a second home, a vacation home that has any equity in it whatsoever, you're going to lose that property. Somehow -- some states the equity that's protected in your primary residence is virtually zero, $7,500, maybe $10,000, some states have no protection. Other states have unlimited home protection. Texas and Florida being the two that get the bad wrap for it. But, actually, it's about seven states. And Kansas is one, and I don't recall the others other offhand. But you won't lose your house in those states.

Cars, there's -- only very, really low value cars or cars with very little equity in them, either a new car where you still owe a lot of money, or an old car that isn't worth very much, those get protected in bankruptcy. So if you have something of great value. Let's say, you're on art collector and it may be unknown pieces at this point, but it's a very valuable collection to you. And somebody could arguably put a value to those paintings. You may not file for Chapter 7. You may choose not to file for Chapter 7 because you don't want to have that taken away from you. And so you may choose Chapter 13.

Chris: When you declare bankruptcy, how long does that haunt you, or does it haunt you?

Robin: Well, I have actually seen these little red flash cards printed by some of the international credit associations that say, bankruptcy, the ten year mistake. And I'm just wondering for whom it's a mistake. Because the reality is for people who file for bankruptcy, they will tell you that the day their case closed they get the letter in the mail from the court congratulating them that the bankruptcy case is over, and the next day the credit card offers just start flooding through the door. Primarily because your creditors know that you don't have any debt anymore, you can't file again for another six years.

And chances are, particularly if you went through Chapter 13, you've got some steady income. And, actually, most people who file for Chapter 7 even have a steady income. Most people file for Chapter 7 once they're at a point where they're not accumulating more debt. And so they've got an income coming in and they can make their monthly payments to live day to day. And that's when bankruptcy makes sense for them. In some reason if I can -- what's the word, you know, go off into a tangent here briefly, that's part of the reason why bankruptcy filings stayed so high in this country while the economy was so strong.

This is the first year in 1999 that we've seen bankruptcy filings actually going down in the last four years. Bankruptcy filings have continued to go up as the economy has been as strong as it's been ever in 30 years. Part of it is that people finally have gotten to the point where they're stable and in a job with regular payments. And they've spent all this time that the economy has been healthy trying to get back on track with their financial situation and pay off their debts. And it's only now that they're coming to realize or, you know, recently I just can't do it. And so that's why bankruptcy filings stayed high.

People are finally now catching up. And most people are reaping the benefits of the strength of this economy. And bankruptcy filings are beginning to go down. But in truth for most people it doesn't haunt you for long at all. If you want to get -- you know, if you want a home loan after bankruptcy, if you've got the income to afford to make mortgage payments and you've got cash from somewhere that you've been able to accumulate in the time since filing for bankruptcy to put a down payment on, you're going to get a home loan.

Chris: Okay. Well, let's take two, the same couple. So, obviously --

Chris: How does a couple determine whether or not they should declare bankruptcy or go to a consumer credit counseling service and their debt could be handled in either situation?

Robin: If their debt could be handled in either situation can --

Chris: So how long does the typical bankruptcy take.

Robin: The typical bankruptcy takes very little time. Let's again divide it between -- obviously, Chapter 13 is going to take up to five years. The process is such that you file -- with a Chapter 13 you file. You then have a court date where you potentially meet with your creditors. You have a meeting before a court, before the judge to get your plan approved. That's called a confirmation hearing. And then once your plan is approved, they'll last anywhere from three to five years.

Chris: How long does it take to get approved, to get to the judge and decide this is okay?

Robin: Usually just a couple months. And, actually, you are obligated to begin making payments under your plan even before the plan is approved. If the plan is not approved, your creditors just got a little bit of money from you, that's okay. And sometimes it takes two or three times to get a plan approved. They're very complicated; very, very complicated.

And so it's often not something that gets approved the first time. You have to go back, you have to modify it, you come back and it can be that whole process.

Chapter 7, you file your papers. And usually within about 45 days you go to the courthouse for something called a meeting of the creditors. Very few creditors ever attend despite its name. It's basically you if you have a lawyer, your lawyer and the trustee. The trustee will ask you some questions, mostly to confirm what's in the papers you filed. Most of these meetings of the creditors last under five minutes, sometimes as few as 90 seconds. And then from that you're perspective, that's basically it.

On rare occasions a creditor may challenge a bankruptcy, may require you to respond to some papers, that rarely happens. Assuming that it goes according to the way the majority goes, you're over basically once the trustee hearing, the meeting of the creditors ends. And then in about, somewhere between three and six months you'll get a notice from the bankruptcy court saying that all of your debts have been discharged and the case is over. You don't have to go back to court. There used to be something called a discharge hearing where you would come back and stand before the judge. And the judge would explain what the consequences are of the discharge. Not anymore. It's done totally on paper.

Chris: How much is it going to cost me to declare bankruptcy?

Robin: If you declare on your own without using a lawyer, you're basically paying the cost of a filing fee which is $175 for Chapter 7. Plus, I would certainly recommend somebody get a good book that explains the process. And that will probably cost up to about $30. Bankruptcy lawyers will charge anywhere from $500 to $1,000 or so to do a Chapter 7. Their fee has to be approved by the bankruptcy court, so they know what the range is that they can charge in their community. If the case has any complexity to it, again, a credit or challenges the bankruptcy or some papers, it will probably cost a little bit more for the lawyer to do any of the extra work.

Chapter 7, that's about it. On a Chapter 13 it's going more expensive. The filing fee is less ironically, it's only $160. But almost everyone uses a lawyer for a Chapter 13 case. And it's a much more expensive process, because the lawyer is involved in more hearings and filing more papers. And that is often about $1,00. The good thing about Chapter 13 is you can basically fold the cost of the lawyer in to your plan, and the then the lawyer gets paid through your Chapter 13 plan. Chapter 7 you have to pay the lawyer in advance before you can actually file, most lawyers require that.

Now, there are also some people called bankruptcy petition preparers that have been sanctioned by Congress. They're part of the bankruptcy code, actually. And they sometimes will complete papers for debtors, mostly in a Chapter 7 case. They charge -- again, their fee has to be approved by the bankruptcy court. And that is anywhere between $50 and $200.

Chris: For most people, would you recommend using a lawyer?

Robin: Again, it's depends on the complexity of the case. If it's a straightforward case where you have few assets, you're not at risk of losing them, your debts are pretty straightforward, you got mostly credit card debts and other dis-chargeable debt, most people can handle it on their own.

It's similar to filing your taxes, if you think about. You know, there's sort of the easy form, the not quite as easy form, and then there's a way complex form. And, you know, lots of people file the really complex form on their own, they really do. They have some instruction manual and they've figured out how to do it on your own. And it's kind of that same thing. There are a lot of papers to file in bankruptcy, but none of the information is that hard. It's basically who your creditors are, how much you owe them, what properties you have. And they give you lists of categories and you fill it in. And most people can figure it out on their own.

Chris: Now, what if someone cosigned a loan?

Chris: What if you cosigned a loan?

Robin: That's a great question, because it really place up the difference between Chapter 7, or one the main differences between Chapter 7 and Chapter 13. If you have cosigned a loan and you file for Chapter 7, chances are you're going wipe out that debt completely and the creditor is going to go right after the cosigner.

Chris: And the cosigner is on the hook.

Robin: And the cosigner is on the hook 100 percent. And because you've wiped out that debt in bankruptcy, the cosigner can not go after you for reimbursement. You have been legally freed from that debt.

Chris: All this is for good relationship?

Robin: Oh, yes. And, in fact, if a cosigner went after you for payment, the cosigner could be held and public fined by the bankruptcy court. Which makes it very clear that creditors -- because at this point the cosigner has now become a creditor of yours. And the bankruptcy code makes it very clear that creditors can not pursue debtors for payment, debtors who are in bankruptcy or who have those debts eliminated at bankruptcy, that they can be fined by doing so.

And this is in fact one reason for people who have a lot of cosigned debt, this is one reason that they might opt for Chapter 13 over Chapter 7. Because happens in Chapter 13, what happens in any bankruptcy case is when you file your papers, something called the automatic stay takes effect. And if you think of the word stay, stay, what happens is your creditors are told to stay. And they can't go after you, the debtor, for payment as long as your bankruptcy case exists. And in Chapter 7 that's only going to be that three to six month period. But the debt gets wiped out and they can't come after you after either.

In Chapter 13 they can't come after you during your case. Your payment is taking place through the bankruptcy court. So during that three to five year period your creditors stay away.

Well, the automatic stay applies to any cosigner, as well, in Chapter 13. So file your Chapter 13 case, you propose a plan to the court, and those creditors have to leave your cosigners alone. So many people who have a lot of cosigned debt will take the opportunity in Chapter 13 or will opt for Chapter 13 to repay that debt so that they don't stick the cosigners with the debt. If you have one cosigned loan, for example, Chapter 7 might still make sense for you. You can also agree privately with the cosigner to say, look, I'm filing, I'm going to wipe out the debt, you're going to be stuck with it. But I want our relationship to remain a good one, and I will repay you outside of bankruptcy. It wouldn't make sense in that situation to file for Chapter 13 just because of the one debt.

Chris: But if you have a number?

Robin: A lot. And, in fact, in Puerto Rico where much of the debt is cosigned it tends to be -- within the Hispanic community there tends to be a lot of relatives helping relatives, a lot of cosigning by loved ones for different kinds of debt. There's a very, very high Chapter 13 filing rate and a very low Chapter 7 filing rate.

Chris: Take a couple, they have a big debt burden. And it can be dealt with by a consumer credit counseling service, or it can dealt with in bankruptcy. How do they decide?

Robin: Oh, it's a tough question. Personally, I think for people it's often a moral question at that point and one of how much discipline they're willing to use. To use any kind of a nonprofit debt counseling agency to repay their debt does take a lot of discipline, it does take a lot of work. And it will take a number of years to repay that debt. And many people would want to struggle and do that. There are others who just need to be relieved from the burden and just need to file for bankruptcy now and get rid of the debt and move on with and free themselves and get the fresh start.

It is just a personal and individual choice. I think there are people who go to bankruptcy prematurely. And so depending on what that debt level is. If you're talking about a $10,000 debt level that can be helped with a nonprofit credit counseling agency, that is preferable over bankruptcy certainly on a $10,000 level. If you're talking about a $100,000 level that qualifies for elimination in bankruptcy, using some kind of a debt counseling agency may take a very, very long period of time and may ultimately fail with that level of debt.

When you're talking somebody in between, it's really a very individual choice. There's a lot of people in society who will frown on those who choose bankruptcy as the option and feel that, look, you need to repay you debt and you admit that you can repay it if you were to go to a counseling agency and you ought to repay it through the counseling agency. Increasingly there are judges who say, look, this is an amount that can be repaid in the counseling agency. I see what your disposal income is here, and I don't think this is a case that qualified for bankruptcy, and I have the discretion to through it out or to send you to Chapter 13 and repay it that way.

There are many people who that becomes the question, do I use a debt counseling agency, do I use Chapter 13? I want to repay the debt, and which is the better approach for me.

Chris: One of the great legislative battles of the past several years for insiders, for people who think about these things has been changing the bankruptcy code.

Robin: That's true.

Chris: It's still out there.

Robin: Oh, it is.

Chris: What is going to happen?

Robin: Oh, you mean I have a crystal ball there.

Chris: What should people be aware of? What should people be watching when it comes to bankruptcy legislation? Because the fact of the matter is this isn't going to be followed too closely week in and week out by most people.

Robin: I can't even find it in my local newspaper. I check. So it's not being followed by very many people, except those on Capitol Hill. And essentially what you have is -- a lot of people in Congress, mostly conservatives but not exclusively conservatives, but a lot of people in Congress who believe that it is too easy to file bankruptcy in this country.

I personally think that they're getting most of their information from the credit card company, because that's the line used by the credit card companies. There are very few other creditors who support this legislation. It's almost only from the credit card industry. The secured bankers don't, the commercial law league of America does not. It's been very clear where the support is.

In any event, what Congress has debated now for a number of years is making it more difficult to file for Chapter 7 by imposing something called a means test, an income level test. Essentially, if your income is lower than X amount of dollars, you would automatically qualify. If it's above that amount, then you have to look at what your allowed expenses are based on IRS schedules of expenses, which are not terribly generous. And then only if you meet some complicated formula, might you be allowed to file for Chapter 7 bankruptcy.

If you don't qualify, you would have to file a Chapter 13. Chapter 13 has its own qualification levels, as well. You have to have a steady income, of course. Your debt burden can't exceed slightly over a million dollars, which most people qualify in that. But they don't always qualify on the steady income level. In which case many people would just no longer be permitted to file for bankruptcy, no longer eligible to file for bankruptcy.

The House has always taken the most, the strictest approach to this bill very clearly specifying what would be required under a means test. And it's a very difficult standard to meet. There is a way out. You could request a hearing before a judge to be allowed to go ahead and file for bankruptcy. Most people can't afford the lawyer to litigate this issue before the judge and would effectively be left out of the bankruptcy system.

The Senate bill has always been a little broader. It has not specifically defined the means test. It has allowed for a little bit more discretion by the judges. The House and Senate have never been able to agree on anything, and there's just been a lot of dying of bills in committee.

There's also been a lot of controversy of whether or not this bill would put credit card payments ahead of some of the most sacrosanct, non-dischargeable debts, such as child support. And because of that Mrs. Clinton has always opposed the bill, and so has her husband. And President Clinton has always come out opposed to the House bill. He says he supports something a little bit closer to the Senate bill. But the Senate bill has never made it out of committee. Or the one time it made it out of committee it died in conference committee. And what emerged there was the House bill, which the president has always said he would veto. So it's never gone anywhere.

It is now at this point in time, the fall of 1999, effectively dead. There has been a vote in the Senate to allow broad debate on the Senate bill, which would probably mean a lot of amendments to the bill that the more conservative members in the Senate don't support so that the bill would never come out of committee or would certainly not be supported on Senate floor.

There have basically been promises to reintroduce legislation, perhaps later this year, perhaps once the House and Senate come back after the Christmas break in January, so early in the second section of this Congress, or perhaps to wait until there's a new president and to see, particularly, if it is a Republican president who might be more in support of bankruptcy legislation. The fight is not over. My guess is it will go on for at least another three years.

Chris: Well, thank you.

Robin: You're welcome.

Chris: Let's start with the basic question. Should Robin and Paul declare bankruptcy?

Robin: No.

Chris: Why not?

Robin: Because most of the debt that they have can not be eliminated in bankruptcy.

Chris: What about going to a debt counseling agency?

Robin: That might be very beneficial to them, except that, again, a lot of the debt that they have is generally not handle by debt counseling agencies. Often debt counseling agencies will not help people who have government loans, student loans, small business administration loans, tax problems.

Chris: They have a big debt burden. How do they start attacking that debt burden?

Robin: They've got to get a handle on their expenses, they've got to understand where their money is going, and they've also then got to look at their debt and break it down into component parts; the student loan, the credit, the house debt.

Chris: All right. Let's break down this debt. Start with student loans.

Robin: There are a lot of repayment options now with student loans. Some of these repayment options will allow you to go out as long as 30 years to be paying your student loans. They may be able to consolidate the loans, they may be able to bring down the interest rate on their loans. So they really need to get in touch with the holders of their loans and find out what options are available.

Chris: Now, what about their first and second mortgage.

Robin: Again, here's a situation where they may be able to refinance going through a mortgage broker to try and find one loan to bring down the interest rate to get them down to one payment a month rather than carrying those two separate debts.

Chris: So the idea is to stretch out these payments?

Robin: Exactly. Go as long as you need to while you're struggling each month. And once the income builds up, then you can begin to pay it down quickly.

Chris: Now, they've got a big chunk of credit card debt. What can they do about that?

Robin: The credit card debt is one place where they may want to consider bankruptcy. They would eliminate that debt, and it would free up their monthly become to repay to work on their housing debt and their student loan debt. Again, also a nonprofit credit counseling agency would certainly be willing to work with them to handle their credit card debt. They can also get in touch with their creditors themselves and try to seek some kind of repayment plan.

Chris: Now, with your experience is Robin and Paul's situation hopeless?

Robin: No. I don't think anybody's debt situation is hopeless, quite frankly. They have a large income. They have a potential to grow that income by both him increasing his work and her taking on work. There are a lot of options available to them with government programs on repaying their student loans. They've got a house, they'll build equity in that house. No, over time they will emerge from this.

Chris: When does bankruptcy make sense?

Robin: Bankruptcy makes sense for people who can benefit by bankruptcy in that they will wipe out most or all of their debts and lose little or no property.

Chris: Well, how long does a bankruptcy haunt somebody?

Robin: The creditors will tell you that it's ten years. The people who have been through bankruptcy will tell you that it's closer to ten minutes.

Chris: They have a lot of late payments. What can they do?

Robin: Well, they're not going to be able to do anything to get them off their credit report, that's just going to happen over time. But to eliminate future late payments, they should get in touch with their creditors and their bank and set up some automatic deductions so the payments come automatically out of their checking account each month.

Chris: Now, what debt can be discharged in bankruptcy?

Robin: Debts are divided into secured and unsecured debts. Dealing with unsecured debts where there's no property attached to it, most of those can be eliminated with some glaring exceptions like student loans, child support and alimony, and some income taxes.

Chris: How long does a bankruptcy take?

Robin: Well, a Chapter 13 as it might sound takes three to five years, that's how long the payment plan lasts. The Chapter 7 is over usually within three to six months. You file your papers, you come to the courthouse, that's your total involvement. And then you'll get something in the mail a few months later.

Chris: And how much does it cost to file for bankruptcy?

Robin: Chapter 7, the filing fee is $175. A good book will cost you about $30, $35. And then if you hire a lawyer, that's anywhere from $500 to $1,000.

Chris: Well, should people hire a lawyer when they're declaring bankruptcy?

Robin: If your case is a complex case with a lot of questionable debt, property you're at risk of losing, you should at least consult with a lawyer. If it's a straightforward case, most people can do it on their own.

Chris: Now, what about cosigners in bankruptcy?

Robin: Chapter 7, if you eliminate a cosigned debt in Chapter 7, your creditors are going to go right after the cosigner. In Chapter 13, however, your co-signors are protected while you're in bankruptcy.

Chris: Take a couple that have a lot of debt that can be dealt with by a debt counseling agency or in bankruptcy, how do they make their decision?

Robin: It's a very personal one. Would they rather struggle, change their lifestyle, and in many ways feel the satisfaction that comes from paying off their debt; or are they in desperate need of that feeling of freedom and an ability to move on with their life?

Chris: Congress has been debating for years changing the bankruptcy laws.

Robin: Right.

Chris: There's a small group of people who have been following the ins and outs, I would include you among that. What is happening?

Robin: Essentially, Congress, or many people in Congress want to make it more difficult to file for bankruptcy. Right now the legislation seems to be dead for 1999. It may resurrect itself in 2000 or when there's a new president.