Problems with Credit

1. Problems with Credit Chapter 19

2. Don’t Let Credit Trouble Get You • Credit can lead to overspending • Emergencies • Poor Planning • Impulse buying • Careless budgeting

3. 20/10 Rule • Total borrowing not exceed 20% of yearly take home pay • Monthly payments not exceed 10% of monthly take home pay • Does not include mortgage/housing • Yearly $21,000=$4,200 • Monthly $1750=$175

4. Credit Counseling • Consumer Credit Counseling (Yellow pages) • Private or government—every state has services that charge little or no fee • Advice for realistic budgeting • Work with creditors to reduce interest rate and set up payment plan

5. Debt Adjustment Service Takes over checkbook, paychecks and bills Given an allowance 3-5 years to pay debts Counsel you Create and supervise budget with you Debt Consolidation Finance company loans you money to pay off debts Must have collateral to secure the loan Debt Adjustment By law, finance companies may not charge you until they perform the service! Consumer Credit File Rights Under State and Federal Law—must provide a copy of this AND a contract.

6. Credit Scams • Credit scam abound! • Includes TV, Internet, telemarketers • “Instant” credit repair does not exist. Beware • Fee before service • Don’t tell you your legal rights • Suggest starting a “new” credit report • Tell you NOT to contact credit bureaus yourself

7. Bankruptcy • Legal process that relieves debtors of responsibility of paying debts—liquidation and reorganization • Protects debtors-gives them fresh start, free from creditors claims • Gives fair treatment to creditors competing for debtors assets

8. Bankruptcy Demographics • The average bankruptcy filer in 2009 was a middle-aged, married, Caucasian woman with a high-school education or some college, employed and earning less than $30,000 a year. • Over-extension of credit, unexpected expenses and reduction of income were the biggest motivators in her bankruptcy filing

9. Bankruptcy Fillings

10. Bankruptcy Fillings

11. Types of Bankruptcy • Involuntary • Creditors file a petition with court asking court to declare you bankrupt • Rare • Court takes over assets • Voluntary • File petition with federal court • Court notifies newspapers and creditors • Court collect assets and sells property • Not enough to pay all debts • Each creditor gets a share • Other debts discharged

12. Chapter 7 or straight Liquidation Wipes out most debts in exchange for giving up assets Child support, alimony, student loans, taxes not wiped out Debtor keeps exempted property—considered necessary for survival Chapter 13 or wage earner’s plan—homeowner’s must use this one Debtors keep property Work out court enforced repayment plan Pay debts over 3-5 yrs Some discharged Bankruptcy: Type you use depends on debt, ability to pay, wages and # in household. Chapter 11 Bankruptcy is for businesses—operate under court supervision

13. Causes • Job loss • Emotional spending • Failure to budget • Catastrophic injury or illness

14. Advantages • Erasing some debts • Exempting some possessions • Allowing certain sources of income to remain unaffected • Low cost

15. Disadvantages • Credit damaged • 10 years • Lose much of your property • Some debts not forgiven • Co-signers have your debt

16. Federally Exempted Items for Individual (vary state to state) • $17,425 equity in a home. • $2,775 interest in a motor vehicle. • Items worth up to $450 for a single item for household goods and furnishings, appliances, clothing and personal items, for a total of not more than $9,300. • $1,150 in jewelry • $1,750 in tools, books, and other items used in a trade or business • Other property worth up to $925