Congress is now considering reform of the Bankruptcy Code. One of the issues Congress is considering is means testing, to assure that people capable of paying their debts do so, and not have their debts liquidated in bankruptcy.

    There is a great deal of speculation that bankruptcies are rampant, that bankruptcy has lost its stigma, and that bankrupt debtors are abusing the system. Are there people abusing the system? Probably. Depending on whose data you believe, there may not be huge numbers of abusers. Are there people who, because of divorce, separation, illness, layoffs or plain poor judgment become overextended and unable to pay their bills? You bet. These are the people who need bankruptcy protection.

    The Department of Consumer Affairs always recommends that people pay their just debts whenever possible. Not doing so creates problems for the debtors, the creditors and all of us. For some, paying the bills becomes impossible. Regardless of what action Congress takes, this much is true: No well informed consumer would lightly enter into a personal bankruptcy. Here are some basic bankruptcy facts:

(1)  Most individuals file a Chapter 13 (or wage earner plan) or a Chapter 7 (liquidation) bankruptcy. In a Chapter 13 plan the debtor must propose for the Bankruptcy Court's approval a plan to repay all or a portion of the debts. In a Chapter 7 liquidation, a trustee takes control of all of the debtor's assets (except some legally exempted) and uses those assets to pay creditors according to their priority.

(2)  In either case, once the bankruptcy is filed, an "automatic stay" is ordered by the Court. During the time of the stay, creditors must cease most collection activity.

(3)  In liquidation cases, once the trustee has distributed assets, the court will discharge the debtor from the remaining debt.

    Does this sound appealing if you are a debtor? Here is what comes with it.

The trustee has the power to investigate the debtor and question him under oath regarding his assets. No undisclosed debt is discharged, and hiding of assets is a crime. Another trustee, the US Trustee, is assigned to monitor bankruptcy filings for frauds against the Bankruptcy Court.

Record of the bankruptcy is on the debtor's credit record for up to ten years. During that time, credit will often be unavailable or available only at less favorable terms.

People or companies other than creditors, such as insurers, prospective employers and landlords may refuse to do business with a bankrupt debtor based on this credit information.

Most assets, of course, are lost other than the exempt ones. In many cases, secured creditors can repossess collateral (cars, appliances or mobile homes) or otherwise foreclose on their security interests.

While people argue over whether bankruptcy continues to carry a stigma, this much is clear: a bankruptcy will be known by family, friends and neighbors as a personal financial failure.