MR. KOJO NNAMDIFrom WAMU 88.5 at American University in Washington welcome to "The Kojo Nnamdi Show," connecting your neighborhood with the world. The reasons vary it might be the result of a layoff or overwhelming medical expenses, perhaps credit card debt that has gotten out of control or a mortgage that's now worth more than the house itself. But more than a million Americans filed for bankruptcy last year and millions more found themselves in dire financial straits.

MR. KOJO NNAMDIThe financial crisis has meant that bouncing back from bankruptcy and rebuilding credit can be much more difficult. And rules passed in 2005 drastically changed the bankruptcy options leading to misconceptions about what bankruptcy can and cannot do.

MR. KOJO NNAMDIJoining us to help explain personal bankruptcy is Sandra Block, she's the personal finance columnist with USA Today. She's the co-author of two books on personal finance, "Easy Ways to Lower Your Taxes: Simple Strategies Every Taxpayer Should Know" and "The Busy Family's Guide to Money," both USA Today. Sandra Block, thank you so much for joining us, good to see you again.

MS. SANDRA BLOCKGlad to be here.

NNAMDIJoining us from studios at NPR Western Los Angeles is Sandra Brown, a financial specialist with ClearPoint Credit Counseling Solutions. Sandra Brown, thank you for joining us.

MS. SANDRA BROWNThank you for having me.

NNAMDIAnd joining us by telephone from Champaign, Ill. is Robert Lawless, he's a professor at the University of Illinois, College of Law. He's also co-director of the Illinois Program on Law, Behavior and Social Science, Robert Lawless thank you for joining us.

PROFESSOR ROBERT LAWLESSThank you for inviting me.

NNAMDIWe're interested in hearing from you at 800-433-8850. Have you considered personal bankruptcy? How did you get into financial trouble? Have you ever declared bankruptcy? Did you manage to rebuild your credit? 800-433-8850 you can send us an email to kojo@wamu.org. Robert, can we start with the basics. What are the two main types of personal bankruptcy?

LAWLESSThere's Chapter 7 and there's Chapter 13. Chapter 7, you file bankruptcy, it tends to be a quicker proceeding. You file, you turn over your assets to the trustee. Most people don't have any assets to turn over because some assets are exempt. If your asset is encumbered by a lien, like you've got a car loan, that asset doesn't get turned over because you're still paying the auto lender or if it's a home mortgage you're still paying the mortgage lender.

LAWLESSSo in Chapter 7, you are paying your creditors out of your existing assets. Most people, over 90 percent of the people, don't have any assets. It tends to be a very quick proceeding.

LAWLESSChapter 13, in contrast, you pay your creditors out of your future income over a three or five-year period depending upon some legal technicalities, mainly of whether you're above or below your median income for a household of your size and your State. In Chapter 13, you don't get a discharge or forgiveness of your debts until you complete all of the planned payments and statistically only about one third of Chapter 13 plans that are started are completed resulting in a forgiveness of debts.

NNAMDISandra Block, what are some of the biggest misconceptions about bankruptcy?

BLOCKWell, I think one is that it's widely abused and that was the basis for the 2005 law that tightened the requirements and actually made it more expensive to file for bankruptcy. I think there is this widespread, there was this widespread belief that people were going on a bender, spending a lot of money and then filing for bankruptcy and getting rid of all their debts.

BLOCKWhat people don't understand is that there are certain debts that cannot be discharged in bankruptcy. Probably the most significant is student loans. If you graduate from college with a lot of student loans, unless you can prove to a very high standard that you not only are poor now, but you will always be poor, you can't discharge student loans.

BLOCKYou can't discharge taxes. And there's been some interesting research, particularly by Elizabeth Warren, the founder of the Consumer Financial Protection Bureau, showing that medical expenses account for a large percentage of bankruptcy. That's really not anybody's fault. And other factors include things like unemployment or never finding a job in the first place so it's factors beyond people's control.

NNAMDIRobert Lawless, we made need to back up to 2005 and the major changes to bankruptcy rules that were passed. What essentially changed?

LAWLESSWell, it made bankruptcy more expensive because attorneys have more work to do under the 2005 law so attorney's fees have gone up. Filing fees went up. It made bankruptcy more of a hassle for people who have to file in terms of paperwork, doing things like credit counseling before and after you file bankruptcy. And then, finally, it just gave less relief once you get there. There's more, if you will, trap doors for people once they're in bankruptcy court that they can fall through and not get the relief that people might have been getting before the 2005 law.

LAWLESSThe 2005 law made a lot of changes. Individually, each of the changes was not that great, but collectively it raised the barrier to getting to bankruptcy court and then it raised the barrier to successfully getting out of bankruptcy court with some sort of effective relief.

NNAMDISandra Brown, what was the effect of the 2005 law for those people who come to you who are considering bankruptcy?

BROWNAt ClearPoint Credit Counseling, what we do offer is the required bankruptcy courses. There are two required courses. The first one is basically a pre-bankruptcy, educational course that every client, prior to filing their petition with the court, is required to take. That information that's given in those courses is mandated by the EOUST.

BROWNThere is a second course which clients are also required to take which is a pre-discharge course which they have to take within 45 days of their creditor hearing date.

NNAMDISandra Block it's not only apparently more complicated, it's also more expensive, is it not?

BLOCKYes, it is. The 2005 law raised the fees, the filing requirements and that basically, you know, people who are considering filing for bankruptcy are usually in financial distress so that has effectively created a barrier to filing in the first place. And some attorneys frankly don't want to take on these cases because they are more complicated and they know that the people can't pay a lot so I think it is sort chasing bankruptcy attorneys out of the business, at least the business of personal bankruptcy.

NNAMDIIn case you're just joining us, it's a conversation about personal bankruptcy that you can join by going to our website, kojoshow.org, or by giving us a call at 800-433-8850. Have you considered bankruptcy? How did you get into financial trouble or have you declared bankruptcy? And how did it work for you? Did you manage to rebuild your credit? 800-433-8850. Robert, is Chapter 13, in which you pay back most of your debts, necessarily the worst of the two options or are there reasons someone might choose that route?

LAWLESSWell, there are sometimes reasons why Chapter 13 can be a better route for an individual. Usually, Chapter 13 is indicated when somebody's got more assets. I could describe Chapter 7 as the chapter where you turn over your assets. So if you have a home that you want to protect and perhaps an automobile, but other assets that you want to protect, sometimes Chapter 13 -- and, you know, again, I should emphasize sometimes Chapter 13 can be a better choice.

LAWLESSUsually, the specifics of whether Chapter 7 or Chapter 13 will be better for any individual situation can be fairly complex and fairly narrowly tailored to an individual situation. I think it's usually good practice to get an attorney to try to go through the bankruptcy courts. Some people try to do it themselves, but I think despite the extra expense having an attorney is probably something that's wise to have.

NNAMDISandra Block, what were the problems in the system that the changes in 2005 were meant to address?

BLOCKWell, that's a good question. That kind of depends on who you ask. There was a perception that there was widespread...

NNAMDII guess I should have said the alleged problem...

BLOCKThere was a perception there was a lot of abuse. A lot of consumer advocates say that was not borne out and they would argue I think that this was mainly a push by the credit card companies, that creditors wanted to make it harder for people to file for bankruptcy and that makes sense because when you file for bankruptcy, your debts are wiped out.

BLOCKSo in Chapter 7, you start fresh. That means your credit card debts go away and your creditors don't get paid. So I think there was an industry interest in raising the bar for this.

NNAMDISandra Brown, could multiple bankruptcy filers really constitute abuse of the system?

BROWNWell yeah, they could. I mean, prior to the law changing, a lot of people were filing bankruptcy repeatedly. With the change in the law, now they're required to take, you know, educational courses to go over it, possible different options that might suit them which makes it a little more cumbersome for them to actually go through with the process of filing bankruptcy.

NNAMDIIf...go ahead, please, Robert.

LAWLESSCan I jump in? I dispute that, that there were a lot of people repeatedly filing for bankruptcy before the 2005 law. I don't think that that was ever documented. I don't think, you know, you've got a system where you've got 1.4 million people filed bankruptcy here in the United States in 2011. And I actually should correct myself, that's 1.4 million cases, that's about two million people because some of them involve a husband and wife. If you have two million people, is there going to be some abuse? Sure, out of two million cases, there's going to be a small minority of cases that are abusive. But I don't think there was any solid evidence.

NNAMDIAnd Sandra Block, that gets us to the essence of the controversy over this and that is numbers, whether or not the abuse was widespread or not.

BLOCKWell, and I think as Robert pointed out, my impression was that was never really documented. People, I think, by instinct, are a little offended at the idea that it should be -- it shouldn't be too easy to file for bankruptcy. Nobody likes to think that their neighbor is living large and then walking into court and getting rid of all their debts while you're dutifully paying them all off. So I understand the thinking there. As I think the professor pointed out, I'm not sure that that has ever been documented.

BLOCKI do believe that just anecdotally based on my contact with consumers people don't do this easily. People do not consider this lightly. There is, in my view, still a stigma to filing for bankruptcy and we can talk about, you know, there are long-term effects that are quite severe.

NNAMDILet me just ask Sandra Brown a little bit more about her experience as a counselor. You've counseled people who have declared bankruptcy before. Are there people, and I'm not sure you can put a number of them, who see bankruptcy as an out from their financial responsibilities?

BROWNThere are, but I think, overall, most people that are filing bankruptcy are in need, especially with the economy today. Most of the people that we see, like what was stated before, you know, they have loss of income. They're unemployed. Really, there's not a whole bunch of options available to them in their current situation. Bankruptcy isn't something that, you know, should be considered lightly. There are a lot of ramifications for filing bankruptcy. Part of the education...

NNAMDIBut...go ahead, please.

BROWN...is to educate them, let them know what's out there so they have other options available to them.

NNAMDIIn fact, it may have been less difficult to come back from bankruptcy a few years ago, Sandra Brown. What's changed?

BROWNI think the credit card companies, you know, had a lot to do with the reform. I do agree with that and I think it's a little bit harder, especially, you know, the way creditors are giving out credit. It's a little more strenuous on them issuing credit to someone that's filed bankruptcy. It's not unknown and they can rebuild their credit and they can bounce back. It just might not be, right now, as quick.

NNAMDIAnd Robert Lawless, Sandra Brown just mentioned, of course, that the credit card companies put a lot of pressure on for this legislation. It's my understanding that you're not a big fan of this legislation. There's certainly more cases of abuse, but we don't know exactly how prevalent those abuses were across the system, do we?

LAWLESSWell, and I think another thing should be emphasized, there were tools already in place before 2005 for bankruptcy judges to police the abuse and their tools were effective and they allowed bankruptcy judges on individual cases to do what we want judges to do, which is to exercise their judgment. And a theme of the 2005 law was to impose standards that took discretion away from bankruptcy judges. And so in an individual case now in a lot of situations a bankruptcy judge's hands are tied. And a lot of it meant to trap abuse is sometimes kicking people who need the release and are not abusing the system out. And the judge just can't do anything about it.

NNAMDIRobert, we got an email from Jackie in D.C. who said, "A recent study found that African Americans are more likely to have their bankruptcy applications adjudicated under Chapter 13 than white applicants who obtain the more favorable Chapter 7. Why?" I suspect that Jackie may be referring to the study that you did on racial bias and bankruptcy filings. Tell us about it.

MR. ROBERT LAWLESSYeah, I think that would -- I think that is actually our study that the email refers to. So we have a study that just came out. It's got two parts to it. First, it uses real world data to document that African Americans are filing bankrupt -- Chapter 13 bankruptcy at much higher rates than people of all other races. In fact, in Chapter 13, African Americans choose that process at a great -- that's greater than for homeowners. And the biggest single legal reason to file a Chapter 13 is to save your home.

MR. ROBERT LAWLESSSo the fact that we're seeing a bigger breakdown on racial lines and a lot of home ownership for Chapter 13 usage is incredible. That's real world data and of course it's correlation. And correlation doesn't necessarily tell you a lot about what's going on. In a second part of the research we sent a hypothetical fact pattern to consumer bankruptcy attorneys. And I've got to give them credit. They responded and did a great service by participating in the study.

MR. ROBERT LAWLESSThe fact pattern had a key difference in that one set of facts the clients were named Todd and Alison. And in the other set of facts the clients were named Reggie and Latisha. And we see the attorneys giving different advice, tending to send Reggie and Latisha to Chapter 13 and Todd and Alison into Chapter 7.

NNAMDIThere are a number of ways to address the bias issue, Robert. What are some possibilities?

LAWLESSWell, I think here in this situation you're talking about a part of the legal community that's fairly self contained, that's fairly small that does talk to each other. And I think the answer to this is the groups -- the professional groups need to sit down and have a conversation among themselves about what it -- what chapters of the bankruptcy code are appropriate for what type of situations and talk about the findings in the study. And what's happening in their offices when clients come in.

BLOCKI don't know that there's a lot of legal solutions 'cause, again, the laws are already in place that should be stopping this, right. It's a matter of getting the actors in the system to see what's going on. I do think one thing that would be useful would be for the court system to begin collecting some demographic information about bankruptcy filers. Bankruptcy is the biggest part of the federal court system. You know, again, two million people had contact with it last year.

LAWLESSIt's something -- it's really a part of a social program. It's really part of -- a big part of our government. And we know very little about the people using it. It's only because of academic researchers that we know what's going on in the bankruptcy system.

NNAMDIRobert Lawless is a professor at the University of Illinois College of Law. He's also Co-Director of the Illinois Program on Law, Behavior and Social Science. Robert Lawless, thank you for joining us.

LAWLESSThank you again for inviting me.

NNAMDIWe're going to be taking a short break. When we come back we will continue this conversation on personal bankruptcy and financial advice and taking your calls at 800-433-8850. Have you had credit counseling? Did it work to help you out of a financial hold? You can also send email to kojo@wamu.org. Send us a Tweet at kojoshow or ask a question or make a comment at our website kojoshow.org. I'm Kojo Nnamdi.

NNAMDIWe're talking personal bankruptcy and financial advice with Sandra Brown. She is a financial specialist with ClearPoint Credit Counseling Solutions. She joins us from studios in Los Angeles. Here in our Washington studio is Sandra Block, Personal Finance Columnist with USA Today and Co-Author of two books on personal finance, "Easy Ways to Lower Your Taxes: Simple Strategies Every Taxpayer Should Know" and "The Busy Family's Guide to Money." Again, you can call us at 800 -- with your questions or comments, 800-433-8850.

NNAMDIWe'll be getting to the phones in just a second but Sandra Block, one of the biggest areas of confusion is around which kind of debts can be forgiven in bankruptcy. What happens, for example, to credit card debt in bankruptcy?

BLOCKCredit card debts can be and are -- in Chapter 7 are discharged. So if your biggest problem is credit card debts, then bankruptcy will provide you some relief. As I mentioned earlier, debts that can't be discharged that often are very burdensome to people are student loans and in most cases, taxes. Other types of unsecured debts can also be discharged in bankruptcy. Perhaps your mortgage, although usually most people who file for bankruptcy are already behind on their mortgages and in danger of losing their homes.

NNAMDIWe might want to -- you might want to explain secured versus unsecured debt.

BLOCKSecured means there's something behind it, your home. If you borrow against your home or your car there is an item there. Unsecured is basically most other things. Your credit cards are not secured because there's nothing for them to seize if you don't pay them. Student loans are unsecured because all you've got is your diploma and nobody really wants to take that away from you.

NNAMDISandra Brown, what about student loans? How does bankruptcy affect that kind of debt?

BROWNStudent loans are not normally dischargeable in bankruptcy. So basically once a client files bankruptcy they're left with their student loans. So a key component to their education is to have a budget, incorporate those expenses in the budget so they can actually pay those debts back.

NNAMDIHere is Brian in Severn, Md. Brian, you're on the air. Go ahead, please.

BRIANHi, Kojo. Thank you. I guess basically I went to school at the Art Institute which is a for-profit school. I enrolled in 2004 and in 2007, I graduated with a B.F.A. in Media Arts and Animation. Now, I met with my financial advisor several times while going to school there. You'd have to bring in paperwork that said this is how much my rent is, this is how much my cable bill is. And they would work up a number for you and they'd say, you know, how much do you want to take out? And I'd say, I want to take out that much. And they would always, always tell me, you should take out more because you don't want to get in trouble, you can't come back for it.

BRIANAnd then, when I would ask the question as to what happens if I've taken out too much money, they'd say, don't worry about it. There's going to be consolidations. You'll be able to get through it. I feel naive. Not stupid by any means, but certainly naive. And, you know, people are being bailed out of their homes that clearly they went in and said I can't afford this house but I'll take it anyway. People get themselves in credit card trouble but I feel like these for-profit education services really took advantage of us, the students. And what is our possible recourse? How can we get out of this?

NNAMDISandra Brown.

BROWNWith student loans unfortunately, like we said earlier, they're usually not dischargeable in bankruptcy unless you have some sort of severe hardship. What you can do with a student loan is a lot of times they will take into consideration what your expenses are and consolidate your loans into one payment in most cases. But usually you end up paying them back.

BLOCKAnd unfortunately -- I don't know if this is the case with Brian, but what happened in 2005, in addition to bankruptcy reform, is they increased the types of loans -- student loans that are usually not dischargeable in bankruptcy. They included private student loans, which aren't issued by the federal government and aren't backed by taxpayers. And they're often more expensive and harder to get out of than federal student loans because there are fewer payment options.

BLOCKAnd a lot of the students -- or graduates that I hear from who are really in trouble have these types of loans and are shocked to discover that they cannot discharge them in bankruptcy even if they don't have a job, even if they don't have anything else. What I tell people is if you do have other types of debts bankruptcy would at least free up some money for you to put towards your student loans. So if you've got a combination of credit card debts and student loans, perhaps bankruptcy might be an option because then at least you free up the money that you're paying your credit card lenders. And you could use that to pay off your student loans.

NNAMDIMatt in D.C. suggests another possible option. I'd like you both to respond to his email comment. Matt said, "I have a lot of private student loans which are not dischargeable through bankruptcy. Private loans also offer less flexible repayment options. It seems that because of this, financing my education with a credit card rather than private loans would have been a safer option. At least that way they could be discharged if I ever got into severe financial problems. Would this be sound advice for college students today?" If you intend to be broke and not repay your debt, it's probably better to finance your education with credit cards.

BLOCKI would -- I've heard that option and I've also heard of people considering paying off their private student loans with credit cards and then trying to get those discharged. I think there's two problems there. One is your interest rates on your credit cards, as bad as private student loans are, is much higher. And if you're going to college the amount of credit card debt you would need to take on to pay off college would be much, much higher than you could get from a student loan.

BLOCKSo what I recommend is max out on federal student loans before you even think about getting a private student loan, because there are a lot more options. And right now there is even loan forgiveness for federal student loans if you make payments every certain number of years.

NNAMDISandra Brown?

BROWNI totally agree that federal loans would be the way to go. You're exactly right. If you're using credit cards to pay your student loans you're going to be paying exorbitant fees on those student loans. Overall if you're filing bankruptcy on everything then you could file bankruptcy on an unsecured debt. But that would not be necessarily sound advice.

NNAMDI800-433-8850, do you have any questions about bankruptcy?: Here is Brian in Rockville, Md. Brian, your turn.

BRIANHello.

NNAMDIHi, Brian. You're on the air. Go ahead, please.

BRIANHi, Kojo. Thank you for taking my call. Yes. I had a question. I have some -- two unsecured debts of about $12,000. And for the last two years, I've been going through a debt settlement process. But I was kind of conned into doing this as opposed to bankruptcy and so my credit obviously is shot. I can't (unintelligible) 'til I pay off these debts. I was able to pay off (unintelligible) I paid off one to get settled for less balance. But at this point I'm wondering is it better for me to file bankruptcy or continue on this route somehow? (unintelligible) my debt.

NNAMDIWhat do you say to Brian, Sandra Block?

BLOCKI actually wrote a fair amount about debt settlement companies last year. And these are these companies you hear on the radio that say they'll settle your credit cards, your good debt for pennies on the dollar. Their record is pretty bad. And what very often happens is people pay a lot of money to these debt settlement companies that claim that they will negotiate with your creditors on your behalf to lower your debt and it doesn't happen. And your credit card -- credit report gets trashed. And a lot of times these people end up filing for bankruptcy anyway.

BLOCKI would say he -- I would at least suggest that this individual talk to an attorney about his options. Because the one thing that bankrupt -- his credit report is already trashed so bankruptcy probably is not going to make it a whole lot worse. And as I said in the beginning, bankruptcy does offer the opportunity for a fresh start. Your debts are gone. And for a lot of people that’s really the only option available to them.

NNAMDIThank you very much for your call, Brian. You too can call us, 800-433-8850 as we move on to Linda in Woodbridge, Va. Linda, you're on the air. Go ahead, please.

LINDAYes, hello. Last year, we took in my mother at the age -- she's 72 and she had had, in 2011, a pretty severe mental health issue with being manic and racked about $100,000 of all kinds of debt. And we actually went through the process through the county agencies aging and poverty law center to look into how her going bankrupt -- or declaring bankruptcy. And ultimately after going through counseling and other then looking at what they said was that they were not going to be able to represent her for bankruptcy because she was what they called selection proof, in which that she did not have enough assets and they couldn't touch her social security. She doesn't have a job, etcetera.

LINDASo, you know, any of the people that would be pursuing her legally for claiming the debt has -- you know, they have no legal recourse to do anything with her. So we're now kind of in this state of ignoring this huge debt that she's got. We did go through one round of sending letters to all of the agencies or the debt collectors saying, you know, quit harassing her. She can't pay the debt. She doesn't have the money, et cetera, et cetera. What we found is that the various debt collectors just basically sold the debt to somebody else and started a whole new round of phone calls.

LINDASo we're trying to figure out what we should do, what's the next step. Should we continue to keep ignoring this? I'm concerned that when she does get to the point where we can no longer take care of her that with all this credit rating, you know, completely shot and none of the issue dealt with, she won't be able to get in anywhere or we're not going to be able to get help. So any suggestions?

NNAMDISandra Brown.

BROWNShe's known as being judgment proof meaning that she doesn't have any assets in order for the creditors to attach to her. Basically she's correct. What the creditors end up doing is selling the debt and you have to start all over again with writing the letters. Usually you can send a seize and assist letter which should stop them. But that doesn't prevent them from selling the account to another collector to try to collect the debt. So basically what ends up happening is you write all these letters and you send all of them to all the different collection agencies that are handling the debt. And it's just a repeated process.

BROWNBut basically they can't attach her wages. If she is judgment proof there's not anything that they can get from her. So there really is an uncollectable debt.

BLOCKAnd I would recommend going to the Federal Trade Commission's website. They have brought a bunch of cases recently -- in fact, there was one in the paper today against debt collection companies. They have a pretty good description of what your rights are. After a certain period of time, that debt goes away. And what some of these companies are doing actually is sort of resurrecting old dead debt and trying to tell people that they still owe it. So I would really get up to date, advise yourself of your rights on this issue. Because if she's not allowed to file for bankruptcy, they're basically saying her debts are going to go away. They cannot pursue you forever.

NNAMDIThank you very much for your call, Linda. And good luck to you and your mom. We got a comment posted on our website. "Can you tell me how long a bankruptcy 7 or 13 stays on your credit? If you pay everything off under your Chapter 13 can you get it taken off your credit report immediately? Can you file Chapter 7 and still keep your home? Will it only impact your credit card debt?" Both of these are questions we had intended to address to you, Sandra Block.

BLOCKChapter 7 stays on your report for -- and, Sandra, please jump in if I get this wrong -- Chapter 7 is on for ten years. Chapter 13 is on for, I think, seven years. I don't think Chapter 13 disappears when you pay your debts. These things just sort of have to age out on your credit report. Now the fact that it's on your credit report for this period of time doesn't mean that you cannot get credit for ten years. But it means the farther away you get from the bankruptcy and the better payer you show yourself to be the easier it will get. But it will be difficult to get credit.

BLOCKAs far as your home, that really depends on where you are. If you owe more on your home than it's worth, which is true for a lot of people these days, there's no asset for them to take. But in reality most people who file for bankruptcy are also behind on their mortgages and end up being foreclosed on anyway. But it's not a given that you will lose your home in bankruptcy. In fact, that's why some people pursue Chapter 13 is to keep their homes in the first place.

NNAMDIWe got an email from someone who wanted to remain anonymous, Sandra Brown. "What about tax-related debt issues?"

BROWNMost taxes are not dischargeable in bankruptcy. There's always extreme cases with anything but in most cases, you know, student loans, you know, taxes that you owe back taxes are not included in bankruptcy. The best advice is to deal with the situation, make a payment arrangement and try to work with them, you know, within your budget.

NNAMDIOn now to Kevin in Talbot County, Md. Kevin, you're on the air. Go ahead, please.

KEVINHi, Kojo. Thank you for taking my call. You covered the student loan and how they interacted with the bankruptcy code and one of the commenters mentioned that a person should exhaust their federally available student loans, and I wanted to share my experience and hopefully get the commenters response on it. I have all federal loans for graduate school, and it's sizeable amount, and I'm going with the IBR which is a flexible repayment plan for now.

KEVINBut I -- my field of work and what I do isn't really compatible with me working for the federal government or somebody who would qualify for the ten year forgiveness rate. At 25 years they will write off the outstanding balance, but that write off will be imputed to my federal income tax return for that year, and so I'll end up owing a significant amount of money to the IRS. I'm wondering, you know, how all of this interacts with the Bankruptcy Code and how this may change your commenters advice to some people who are thinking about whether for-profit or non-profit, federal or private student loans, and I'm happy to take my answer off the air.

NNAMDIThank you for you call, Kevin. Sandra Block?

BLOCKWell, what the caller referred to was the income-based repayment plan which is a fairly new program for borrowers with federal student loans. It does let them make payments based on their income, and after 25, or it's gonna fall to 20 years, the balance will be forgiven. He's right. There will be a tax issue, but I still think that would be far less onerous than what's happening to borrowers with private student loans whose only hope is basically that eventually the lenders will stop trying to collect that money.

BLOCKThat's really all that there is out there for them. So I do believe that the IBR is a better option, and as far as tax forgiveness, there are ways to reduce that tax hit. So we haven't reached the point where anybody's had that problem, but I still think it's a lesser problem to have than the ones facing folks with private student loans.

NNAMDIGot to take a short break. If you have called, stay on the line. We'll try to get to your call. You can also get in touch with by email to kojo@wamu.org, by tweet @kojoshow, or simply going to our website kojoshow.org. I'm Kojo Nnamdi.

NNAMDIWe're talking personal bankruptcy and taking financial advice from Sandra Block, personal finance columnist with USA Today. She's also the co-author of two books on personal finance, "Easy Ways to Lower Your Taxes: Simple Strategies Every Taxpayer Should Know," and "The Busy Family's Guide to Money." Joining us from studios in Los Angeles, is Sandra Brown. She is a financial specialist with ClearPoint Credit Counseling Solutions.

NNAMDII'll read two emails we got, one from Rita, the other from Eddie. First Eddie. Eddie said, "I filed for bankruptcy just before the change in the law in 2005. That year, as a 25-year-old college student, I had $30,000 in credit card debt. The bankruptcy wiped out my balance. My credit rating did take a hit for a few years after the bankruptcy, but it has rebounded. Last year I was able to buy a home at 4.25 percent and I have a $10,000 line of unsecured credit at competitive rates. I did learn my lesson in don't buy anything I can't afford to pay within a few months."

NNAMDIBut here's what we got from Rita. "Prior to the 2005 reform, a former friend of mine used bankruptcy as a line of credit three times, the most recent five years ago I guess that had to be, after the 2005 reform. He raised $65,000 of credit card spending. She kept her home and retirement. Reform was necessary," says Rita about the actions of her former friend. To what you say what, Sandra Brown?

BROWNThat's a, you know, that's a unique individual situation, but before the reform, it was easier for people to file bankruptcy. Now there's steps that are set, you know, set in place, such as, you know, the education. It doesn't prevent people from filing bankruptcy, but it gives them options as to how to avoid it possibly in the future. Um, and hopefully with the reform, the education is actually, you know, helpful to the clients.

BROWNA lot of times, you know, prior to the change, people were unaware that there were other options out there, other than bankruptcy, and in most cases, you know, people that are filing bankruptcy, they're in dire need of filing bankruptcy. They really don't -- some of the options don't apply them, they don't have the resources. What they really need to do is make sure that they have a budget, find out what their expenses are, you know, what their cash flow is, what they have coming in and out, because that's gonna tell them what options might be available to them, whether that be bankruptcy or any other form of credit counseling, or a debt management program. Anything is possible, it just depends on what they're working with.

NNAMDISandra Block, we got an email from Debbie in Columbia, Md. "It is often said that people start with a clean slate after bankruptcy. Even though the bankruptcy may last ten years on your credit report, businesses keep bankruptcy information in their records permanently, therefore, you will never be eligible for the best interest rate again."

BLOCKWell, I think the email you got from Eddie suggests that is not necessarily the case., that people do recover, but I do think that people have to think very long and hard about the implications of this if it's possibly avoidable. One thing we didn't mention is that increasingly employers are looking at credit reports as part of the job application. Now, they have to ask your permission, but if you say don't look, they probably aren't gonna call you for a second interview, and bankruptcy is gonna be on there, and that will, particularly if you're applying for a high-security position or something that involves dealing with finances, it could cost you a job.

BLOCKSo people do need to think about this, that -- that this is on your record and there are ramifications. On the other hand, I do think people can rebuild their financial lives, and sometimes it's the only way they can do it.

NNAMDIHere is Mary in Gaithersburg, Md. Hi, Mary.

MARYHi. Thanks for taking my call. I'm calling specifically for someone who really does need to declare bankruptcy who probably will qualify for Chapter 7, who has exhausted every source of income who is running out of employment benefits, who does not have income at all, and my question is, does your panel have any suggestions for someone who's in this type of situation who definitely needs help but has no money to pay a lawyer to even look at starting bankruptcy?

NNAMDIWell, Mary, your sentiments are echoed by Gary who sent us an email. "How difficult is it for a person to file Chapter 7 on their own in order to avoid high attorney fee?" So I guess, Sandra Brown, we're talking about both the alternative to an attorney, or how to pay an attorney if you're basically broke.

BROWNYou can file for fee waivers with the court to reduce court costs, but you have to qualify by the poverty guidelines. As for self-filing, you can self-file if you choose to. The only problem sometimes with self-filing is if you're not familiar with the paperwork and something comes up, or there's a problem in your petition, a lot of times what I've run into is people come back because their cases are being dismissed because they're not doing something or something's not correct, and they don't know how to correct it themselves.

BROWNBut you can also look for Legal Aid. If you are the poverty level, most states do have a Legal Aid program in your state that might be able to help you, you know, prepare those petitions for the court and a lot of people do self-file.

NNAMDIThank you very much for your call, Mary, and here now is Walter, speaking of lawyers. Walter is in Silver Spring. Walter, you're on the air. Go ahead, please. Speak of lawyers.

WALTEROkay. Thank you. I filed for bankruptcy three years ago, and I had no idea how to go about it except look in the yellow pages for lawyers who does bankruptcy, and I called a number of them to find out the price. The price quoted for a minimum of $400 up to $2,000. So I picked one and at the meeting he checked my debt income and everything, and he told me there's two kinds of chapters, 7 and 13, and he told me you should go Chapter 7.

WALTERWell, earlier in your program you talked about African Americans having problems. I don't think it's the court the issue, the issue is the lawyers. The lawyers are the one that are telling the customer they should go Chapter 7 or 13. So in this case, the -- an African-American if he is filing for bankruptcy should be aware what they should ask.

NNAMDIOne interesting aspect of filing for bankruptcy, Sandra Brown, is that credit counseling is now required for people who file for bankruptcy. What is credit counseling, how can it help, and could it have helped somebody like Walter, or can you only get that credit counseling after you have filed for bankruptcy?

BROWNNo. Actually you're required to take a counseling course prior to filing your petition. There are people that do file emergency filing where they file the petition prior to getting the counseling.

NNAMDISo Walter should have been able to get that counseling and that counseling should have enabled him to make an informed choice without having to depend on the lawyer to do that?

BROWNWell, he would get all the information. We do give the information regarding 7 and 13 and explain the differences.

NNAMDIWell, allow me to ask Walter, did you get counseling before you filed? Walter?

WALTERYou talking to me?

NNAMDIYes. Did you...

WALTERYes.

NNAMDIYou got credit counseling before you filed?

WALTERYes.

NNAMDIAnd that...

WALTERIn my initial meeting.

NNAMDIIn your initial meeting with the attorney?

WALTERYes. And he told -- gave me the whole prospect, what choices I had, but he suggested I should go Chapter 7. Now, if he had said Chapter 13, probably I would have followed his advice, but I'm glad he didn't.

NNAMDIOkay. Sandra, did Walter do anything wrong -- incorrectly, that is?

BROWNNo. And normally speaking...

NNAMDIProcedurally?

BROWN...part of the reform is that attorneys are required to give what's called a means test. The only person that can give a means test is an attorney, and that helps the attorney determine what option is best for the client based on their assets, you know, what they owe and what they own, and that means test will tell them whether they fall in a category of a 7 or a 13. And that's something that an attorney does. You know, ultimately it is the, you know, the client's choice to file whatever bankruptcy that they see fit for them.

BROWNBut the means test will tell the attorney which option is best to them based on their assets because there are things that are, you know, exempt and all different legal ramifications that the attorneys can go over with the individual, and some people are a better fit for a 7 because they possibly, you know, don't have any assets. A 13, they might own property and, you know, they might have savings accounts that, you know, are not protected. So there's -- everyone's situation is a little bit different when it comes to bankruptcy, but the attorneys should be administering -- as far as I know, they're required to administer a means test to every client.

NNAMDIWalter, thank you very much for your call. Let's see if we can talk with an attorney. I think Brett in Greenbelt, Md. might be a bankruptcy attorney. Brett, are you?

BRETTYes, I am. In fact, I'm standing right outside the bankruptcy court right now.

NNAMDIOkay. Well, please go ahead.

BRETTI wanted to talk a little bit about Chapter 13, and some of the benefits it has for my clients. It hasn't been talked about a lot today, but you may have the ability to completely wipe out or strip off an unsecured second mortgage on your house. You also may be able to get time to be able to pay your taxes back, and in the case of student loans, which everyone's been hearing is a huge problem, you can actually completely stop all collection activities in connection with both federal and private student loans for a period of five years through a Chapter 13 plan. So for a lot of the listeners, that may be a very good option for them.

NNAMDIOkay. Thank you very much for sharing that with us, Brett. Sandra Block, before we go, you mentioned earlier medical costs. A few years ago a study came out that showed a majority of bankruptcies were due to medical costs. Is that still a major factor in bankruptcies?

BLOCKI think it is, and I don't know that the study has been -- this research has been updated since around 2009, but it just stands to reason that the -- given the economy and the continued rise in people who don't have insurance, that this is going to continue to be a factor. There was an interesting article in the New York Daily News the other day about how out-of-network charges are just hitting people with huge, even insured people are getting hit with huge bills because they went to the emergency room or something got treated by an out-of-network doctor and now they've got a big bill.

BLOCKSo I think there's no question that medical is going -- and it causes people to quit working or disables them, and that's another factor that causes bankruptcy.

NNAMDISandra Brown, medical expenses are one reason someone might file for bankruptcy, but there are many others. What have you seen in your own experience in credit counseling?

BROWNMedical debt is one of the highest reasons why people are filing bankruptcy. What I see also, loss of employment, reduced income. Those are the main things that people are filing bankruptcy, those are their hardships in most cases. There's very -- those are the mains ones is basically medical debts and reduced income and unemployment.

NNAMDIWe got an email from Laurel. "My husband I took out money on credit cards to refurbish a house a couple of years ago, but the value of the house hasn't increased enough for us to roll that debt into the mortgage yet, so we're stuck with about $60,000 on higher interest rate credit cards since the introductory offers have expired that are sucking us dry. Most of the credit card debt is in my name. If I file bankruptcy, will my husband's credit be affected as well? Would we be at risk for losing our house? My husband is the main signatory on the mortgage." Sandra Block?

BLOCKWell, it partly, as I said earlier will depend -- and Sandra, please jump in and correct me here if I'm wrong, but I think if they have equity in the house, if they're not underwater on the house, then yes, their house could be at risk because it could be an asset that's seized to pay off their creditors. So -- and this question about -- comes up all the time about well, if I just put it on my credit report, it is her credit report, but ultimately I think it could hurt both of them, even if it's just on her.

BLOCKThe creditors could go after their joint assets, their joint income, so I'm not sure that confining the bankruptcy to one person's credit report is really going to solve their problems.

NNAMDISandra Brown?

BROWNThat is correct. That is correct.

NNAMDIAnd I'm afraid that's all the time we have. Sandra Brown, thank you for joining us.

BROWNThank you having me.

NNAMDISandra Brown is a financial specialist with ClearPoint Credit Counseling Solutions. Sandra Block, always a pleasure.

BLOCKGreat to be here, Kojo.

NNAMDISandra Block is the personal finance columnist with USA Today. She's the co-author of two books on personal finance, "Easy Ways to Lower Your Taxes: Simple Strategies Every Taxpayer Should Know," and "The Busy Family's Guide to Money." "The Kojo Nnamdi Show" is produced by Brendan Sweeney, Michael Martinez, Ingalisa Schrobsdorff, and Tayla Burney, with assistance from Kathy Goldgeier and Elizabeth Weinstein. The managing producer is Diane Vogel. The engineer is Andrew Chadwick. A.C. Valdez is on the phones.

NNAMDIPodcasts of all shows, audio archives, CDs and free transcripts are available at our website, kojoshow.org. We encourage you to share questions or comments with us by emailing kojo@wamu.org, by joining us on Facebook, or by tweeting @kojoshow. Thank you all for listening. I'm Kojo Nnamdi.