Bankruptcy Bill

Controversial Legislation

A bill that would produce the biggest change in federal bankruptcy laws in more than 25 years hit a snag last night just as it appeared to be about to pass.

Senate leaders decided to postpone until today the final vote on the measure, which would make it more difficult for individuals to wipe out debt through bankruptcy.

Sam Gerdano, executive director of the American Bankruptcy Institute, will be online Thursday, March 10, at 11:15 a.m. ET to discuss the controversial bankruptcy bill.

Read the story:

Senate Delays Action on Bankruptcy (Post, March 10)

A transcript follows.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

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Sam Gerdano: Good morning. At 11 am ET today the Senate is about to resume consideration of the bankruptcy legislation. It would, if passed as expected, make the most significant change to consumer bankruptcy laws in a generation. The American Bankruptcy Institute Web site, www.abiworld.org, contains links to real-time Senate action and summaries of the issues under debate, including a full analysis of the bill and its potential impacts. I'm Sam Gerdano, Executive Director of the ABI, a non-profit non-partisan education and research association of bankruptcy professionals. Our 10,000 members represent both debtors and creditors in commercial and consumer cases all over the U.S. I am happy to chat with you today about the legislation.

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Alamo or Kalamazoo, Mich.: Does the bill have 180 Days after the president signs it before it becomes final law??

Therefore, one could still file under the old law until 180 days has passed and then they are forced to file under the new law.

Sam Gerdano: You are correct. Most of the bill's provisions go into effect 180 days after the President, as expected, signs the bill. The bill will probably pass the House early next month and be signed shortly thereafter. You will have 180 days from that date to file under current law. This is the law that would apply in your case and this law is more debtor-friendly than the new law. Please consult an experienced bankruptcy attorney before making the decision to file. You can find links to certified bankruptcy specialists from our website, www.abiworld.org

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Washington, D.C.: What is the difference between Chapter 7 and Chapter 13 bankruptcy?

Sam Gerdano: Chapter 7 is the most common form of relief for consumers. In this chapter, most unsecured debt (credit cards, medical bills, consumer loans not secured by property) is usually discharged, meaning you do not have an obligation to pay. Secured debts (home mortgages, auto loans) must be paid or the property will be lost. In the overwhelming percentage of cases, there are no non-exempt assets to distribute to unsecured creditors. Under Chapter 13, such creditors are repaid in installments in full or in part over a 3 to 5 year period. Chapter 13 is for individuals with a regular income; your paycheck typically goes directly to a bankruptcy trustee who makes distributions pursuant to a court approved plan of reorganization. The new law is designed to shift more debtors from chapter 7 to chapter 13. You can learn more about this from the consumer section of our website.

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Washington, D.C.: How different are the House and Senate versions of this bill? Will the conference go smoothly, or are there big make or break issues for the two chambers?

Sam Gerdano: The Republican leadership in the Senate and House are trying to pass the identical bill, thereby avoiding a conference committee. That is why the Senate has rejected virtually all efforts to amend the bill on the Senate floor. If passed, the Senate bill, S. 256, will likely be accepted "as is" by the House, allowing it to quickly proceed to the President.

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Washington, D.C.: I understand a means test is involved in determining if you can file Chapter 13 or 7. Is the test based on current or previous income?

Sam Gerdano: The means test in the new law looks first at your average income in the 6 months before you filed for bankruptcy. It then compares this number to the median family income in your state. If your income is over the median, the next phase of the means test is applied, dealing with your allowed household expenses. Averaging your income however, might disadvantage those who've lost a job during the 6 months -- that they earned a high income previously would skew the result to suggest they have greater repayment capacity. This is one of the shortcomings of the means test.

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Duluth, Minn.: Will the new law affect student loans?

Sam Gerdano: Student loans are not dischargeable in bankruptcy under current law and the proposed new law does not change this. The only exception to the above rule is for a demonstrated hardship, where a court determines that you have no current or prospective ability to repay. Judges have a fair amount of discretion here; thus the outcome depends on the particular facts of each case. Please consult an experience bankruptcy lawyer for help.

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Bridge City, Tex.: Who were the 14 Democrats that voted for the Bankruptcy bill? Where can I see a list?

Sam Gerdano: A record of how the Senate voted on all amendments and on final passage can be found from a link from our homepage, American Bankruptcy Institute.

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Annapolis, Md.: Hi--

Consumer spending accounts for about two-thirds of U.S. economic activity.

Do you think the new bankruptcy legislation will slow down consumer spending and encourage people to save more money and spend less?

And if the legislation does reduce consumer spending, do you think there will be any economic fallout from that?

Sam Gerdano: You are right that consumer spending accounts for two-thirds of the domestic economy. Indeed, our economy tends to stall when consumers pull back on their spending and use of credit. Bankruptcies rise during an expanding economy and drop in the wake of a recession. The Federal Reserve closely tracks such consumer activity, and may need to adjust U.S. monetary policy if consumers respond to a tougher bankruptcy law by sharply reducing their use of credit.

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Cave Creek, Ariz.: What effect will the proposed change in federal bankruptcy law have on state bankruptcy laws?

Sam Gerdano: Bankruptcy is a federal law only; there are no state bankruptcy laws for individuals or businesses.

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Newburyport, Mass.: I think we need to be cautious with regard to the 180-day effective date. A very important exception is the cap on state homestead exemptions, subject to its own exceptions, and the 10-year look back period with regard to fraudulent transfers and its impact on homestead exemptions, both of which take effect immediately upon the legislation becoming law and not at a later date.

Sam Gerdano: That is correct, and one of the exceptions to the general 180 day rule. In a bill of over 500 pages, there are many traps for the unwary. Those contemplating a bankruptcy soon are advised to consult with experienced counsel now.

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Bankrupt in Bowie, Md.: I'm considering filing Chapter 7 Bankruptcy as I have been unemployed for almost 9 months with mounting bills, credit card defaults, three tax liens and two judgments.

I have a part-time job that earns me substantially less than the proposed state income threshold, for the new law. Should I go ahead and start filing now? Or, still hold out that I will get a job and be able to pay all these debts within several years? The stress is overwhelming and am thinking that it will be harder later, than now to have my financial slate wiped clean.

Also, since I can't afford a lawyer to file, what do you recommend for do-it-yourselfers to declare bankruptcy on their own?

Sam Gerdano: I appreciate the stress you are under. It is true that sometimes bad things happen to good people. However, I urge you not to try to file a pro se bankruptcy -- under current law or the coming new law. Please consult the roster of local counsel from the American Board of Certification (accessed from American Bankruptcy Institute).

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Silver Spring, Md.: Is there a way to treat bankruptcies differently, i.e., someone who is insolvent because of medical bills and someone who leased huge SUVs, ran up credit card bills traveling to Europe and dining out at the best restaurants and buying designer clothes? Although both individuals are unable to pay the bills, the reasons are vastly different. Please tell me that there is hope for someone who is not a selfish overspender.

Sam Gerdano: The law generally does not make distinctions about "why" you have filed for bankruptcy. But some debts are not dischargeable for public policy reasons: child support, alimony, debts incurred through fraud and the like. The new law will maintain this general structure and it exempts from the means test those with serious medical conditions, or active duty service members for example. Chapter 7 will still be available to honest but overextended debtors. However, there are more procedures to follow and costs to bear, and the scope of relief may be reduced.

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Alexandria, Va.: Does the bill require creditors to disclose more info. about late fees and penalties?

Sam Gerdano: Late fees and over the limit charges can add to your total debt burden fairly quickly. However, credit industry practices are not generally covered by the bill. An amendment that would have required credit card companies to specifically disclose the impact of your only paying the monthly minimum was defeated.

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Sam Gerdano: Thank you for joining me today. There are many more questions I'd like to address but for a lack of time today. Those who posted questions not addressed are invited to visit our Web site American Bankruptcy Institute next week where we will have a special page devoted to these questions and answers.

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