Chapter 19 Problems with Credit
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Transcript Chapter 19 Problems with Credit
Chapter
19
Problems with Credit
The 20/10 Rule
The 20/10 Rule is a plan to limit the use of
credit to no more than 20 percent of your
yearly take-home pay, with payments of no
more than 10 percent of monthly take home
pay.
Mortgage loans and monthly payment commitments
for housing are not included in these limits.
However, all other types of borrowing are included
in the limits of the 20/10 Rule.
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A Credit Payment Plan
A credit payment plan is a record of your
debts and a strategy for paying them off.
List all debts, with enough information to analyze
which ones should be paid off first.
Focus on paying one off at a time, while making
only minimum payments on others.
As one gets paid off, shift your focus to the next
priority.
A credit payment plan works best when you
are responsible and do not incur new debt.
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Legal Recourse
When credit problems arise that cannot
be solved by your own actions or through
assistance, the final step for relief is
bankruptcy.
When you are bankrupt, you are unable
to meet your bills.
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What Is Bankruptcy?
Bankruptcy is a legal process that relieves
debtors of the responsibility of paying their
debts or protects them while they try to repay.
When you declare bankruptcy, you are said to be
insolvent.
This means you have insufficient income and assets
to pay your debts.
Bankruptcy is a second chance, but it carries
serious consequences.
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Bankruptcy Laws and
Their Purpose
Bankruptcy law in the United States has
two goals.
The first is to protect debtors (people who
owe money) by giving them a fresh start,
free from creditors’ claims.
The second is to give fair treatment to
creditors competing for debtors’ assets.
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About Personal Bankruptcy
Bankruptcy is a court proceeding.
Bankruptcy remains on your credit
report for 10 years.
Each debt that was discharged under the
bankruptcy petition (such as credit card
accounts) may remain on your report for
seven years.
You should hire an attorney to file
bankruptcy.
Bankruptcy Laws and their
Purpose
Bankruptcy law in the U.S. has two goals:
1. Protect a debtor by giving them a fresh
start, free from creditors’ claims.
2. Give fair treatment to creditors competing
for a debtor’s assets.
Bankruptcy laws treat two general
classes of debt: secured and
unsecured.
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Class of Debt
With secured loans, the debtor has
pledged specific assets as collateral for
payment.
If the debt is not paid, the creditor can
repossess the asset that has been
pledged.
For unsecured debt, no specific asset is
pledged, but all of the debtor’s resources
are considered in a bankruptcy action.
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Types of Bankruptcy
Chapter 11 bankruptcy
Chapter 7 bankruptcy
Chapter 13 bankruptcy
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Chapter 11
A reorganization form of bankruptcy for
businesses that allows them to continue
operating under court supervision as they repay
their restructured debts.
Existing management retains control of a
business unless a trustee is appointed by the
court.
The trustee is a person who will oversee the assets
of the business and file court reports.
The main purpose: reorganize their debt
structure
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Chapter 7 Bankruptcy
For individuals, there are two basic ways to file
bankruptcy: Chapter 7 or Chapter 13.
Chapter 7 Bankruptcy is a liquidation form of
bankruptcy for individuals. (Commonly called straight
bankruptcy.)
Debtors must give up all their property except for
certain exempted items.
The advantage of Chapter 7 bankruptcy is immediate
debt relief.
Recent bankruptcy laws make it more difficult for a
person to qualify for straight (liquidation) bankruptcy.
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Exempted Property
Exempted property is an asset or a possession
that the debtor is allowed to keep because it is
considered necessary for survival.
Federal and State laws allow a number of items
to be exempted such as:
Some equity in a home
$3,200 for a motor vehicle
Items worth up to $200 each
Some jewelry/tools/books
Proceeds from life insurance; unemployment; pensions
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To file bankruptcy you must also
provide:
a copy of your latest tax return for a
Chapter 7.
past 4 years’ tax returns for a Chapter 13.
a certificate of credit counseling.
evidence of earnings in the past 60 days.
monthly net income and any anticipated
increase in income.
a photo ID.
The Court appoints a trustee
The trustee arranges for the sale
of your non-exempt property and
is responsible for paying as many
of your debts as possible with the
proceeds.
• Not all debts can be erased by
bankruptcy.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a reorganization
(payment plan) form of bankruptcy for
individuals.
It allows debtors to keep most of their property
and use their income to pay a portion of their
debts over three to five years.
Under Chapter 13, often referred to as the
wage-earner’s plan, some debts are totally
discharged, but family obligations still remain
for child support and alimony.
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Key points
You can only file bankruptcy under one category at a
time.
Chapter 7 offers a financial fresh start and is a
quicker process compared to a Chapter 13.
A means test will determine if you are eligible to file
Chapter 7 or repay part of your debt under a Chapter
13.
Pre-bankruptcy credit counseling and pre-discharge
debtor education are bankruptcy requirements.
Chapter 7 can be filed only once every eight years.
You cannot file Chapter 13 if you obtained a
bankruptcy discharge in the past 2-4 years.
Repercussions of Bankruptcy
When you file Chapter 7 bankruptcy, all
your property except exempt assets will
be sold to pay your creditors.
•
An exempt asset is property you are
allowed to keep during bankruptcy.
If you file a Chapter 13 repayment plan, it
will take three to five years to repay your
debts and receive your discharge from
the court.
Bankruptcy will not remove:
Child support and alimony
Debts for personal injury or death that you caused
while under the influence of alcohol or illegal drugs
Student loans
Fines and penalties for law violations, such as traffic
tickets, court-ordered payments or recent property
tax assessments.
Income taxes from the past three years and other tax
debts
Credit purchases of $1,150 or more for luxury items
within 60 days of filing
(continued)
Bankruptcy will not remove:
(continued)
Loans or cash advances of $1,150 or more taken
within 60 days of filing
Debts owed to a single creditor of more than $500 for
luxury goods purchased within 90 days of filing
Cash advances of $750 made within 70 days of filing
Debts or judgments based on fraud or other illegal
activities
Criminal restitution resulting from illegal activities
Debts you owe from a divorce decree or settlement
Any debts you forgot to list in your bankruptcy filing
Key Points
Bankruptcy remains on your credit
report for up to 10 years
• This can make it difficult to get new
credit, find a place to rent, get
insurance or qualify for some jobs
Unless you change your financial
habits after you file bankruptcy, you
might fall into debt again
To Declare, or Not to Declare?
Bankruptcy is not a way to avoid debts you
can afford to pay but just don’t want to pay.
Bankruptcy will not allow you to keep your
house and cars if you have a mortgage or car
loan unless you pay your creditors.
Bankruptcy will immediately stop most
collection efforts against you.
Creditors can’t take further action against
you unless they obtain permission from the
bankruptcy court.
Major Causes of Bankruptcy
Business failure / Job loss
Emotional spending
Failure to budget and plan
Catastrophic injury or illness
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Advantages of Bankruptcy
Debts are erased.
Exempted assets are retained.
Exempted property refers to those assets
considered necessary for survival.
Certain incomes are unaffected.
The cost is small.
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Disadvantages of Bankruptcy
Credit is damaged.
Property is lost.
You may not qualify for liquidation.
Some debts continue.
Some debts can be reaffirmed.
Co-signers must pay.
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Credit Cards
Will I be able to get a new credit
card?
• You might have trouble getting a
regular credit card, but you will
probably qualify for a secured credit
card if you put money in a savings
account to guarantee the card.
Banking
Can I open a bank account?
• Unless you have abandoned a bank
account while owing money, bounced
checks you never paid back or had a
bank account closed on suspicion of
fraud, you should have no trouble
opening a new bank account
subsequent to filing bankruptcy.
Current Employment
Will bankruptcy affect my job?
• The Bankruptcy Code specifically
prohibits employers from
discriminating against current
employees who file bankruptcy.
• The law applies to private and
government employers.
Looking for work
If you look for a new job while the
bankruptcy is still listed on your
credit report, potential employers
may choose to reject you.
There is no law to prevent this from
happening.
Re-establishing Credit
A Chapter 7 bankruptcy will stay on your
credit report for 10 years.
•
Home and auto loan and credit card
applications may ask if you’ve declared
bankruptcy, and your answer may be a factor
in the lender’s decision.
•
You may be able to qualify for a mortgage or
car loan at a higher-than-average interest rate.
You should be able to qualify for a secured
credit card if you deposit money in a bank
account to guarantee the card.