Chapter 16.1

1. Chapter 16.1 Getting Unstuck

2. 20/10 Rule • Total borrowing should not exceed 20% of annual take-home pay. • Monthly Credit payments should not exceed 10% of monthly take-home pay. • Note – This does not include monthly payments made on a mortgage (a loan on a house).

3. Credit Counseling • Where can you go for help? CCCS (Consumer Credit Counseling Service) (Part of the NFCC (www.nfcc.org)(National Foundation for Consumer Credit) Churches, private foundations, credit unions military bases, universities, federal housing authorities….also provide help. • These will help you set up a budget, get a loan, help you get better rates from your lenders, and set up better payment plans.

4. Debt Adjustments Debt-Adjustment Service Plan Debt Consolidation Loan • Finance company takes over your checkbook and pays your bills for 3 to 5 yrs. • Must have sufficient monthly income to be eligible for this type of help. • You are given a monthly allowance • You receive help in budgeting and credit cards are taken away and slowly given back • Finance Company loans you money to pay off your debts. • You make one payment a month to Finance Company until your debt is paid off. • Must have collateral to secure money loaned to you.

5. Credit Repair • Once your credit rating has been damaged, what can you do to repair it? • Obtain copy of your credit report and challenge incorrect information • Start using credit more responsibly • Begin paying off your debts through Credit Counseling or Debt Adjustment or both • Avoid using credit card or only charge small amounts that can be paid off every month

6. Beware! Credit Scams Abound! • You may find many pop-ups on the internet regarding counseling, adjustment, or repair. • Look-out for promises that commit to paying off your house and require signatures • Watch for requests that require a fee prior to the credit service (by law, finance companies may not charge until promised service has been performed)

7. Beware! Credit Scams Abound! • Look-out for programs that suggest you give your social security number in setting up a new credit report. • Watch-out for programs that suggest you not contact the credit bureau and those that avoid telling you your legal rights.

8. Bankruptcy • Claiming bankruptcy relieves the debtor of of the responsibility of paying their debts or protects them while they try to pay off their debts. Bankruptcy is a second chance, but carries serious consequences.

9. 2 Classes of Debt Treated by Bankruptcy Secured Unsecured • Loans backed by specific assets that debtor pledged as collateral to assure repayment • Loans that is not backed by pledged assets. In Bankruptcy, most of debtor’s resources may be used to repay this kind of debt.

10. The 2 Ways Bankruptcy deals with debtors. See below. Bankruptcy Can be Voluntary or Involuntary

11. Bankruptcy For Businesses For Individuals • Chapter 11 • Companies are allowed to continue operating under court supervision as they repay their restructured debt. • Chapter 7 • Commonly called “Straight Bankruptcy”. • Uses “Liquidation” to wipe out debt • Debtors required to give up all their property except of excepted items • Chapter 13 • Commonly called “Wage-Earners Plan” • Uses “Reorganization” • Uses Court-enforced repayment plan • Best plan for reestablishing good credit rating but will take many years to recover Note – In Chapter 13 Bankruptcy, Family obligations still remain for child support and alimony.

12. Reaffirmation of Debt • Definition: Agreement to repay discharged debts. Why might someone want to reaffirm a previous debt? • Debtor decides that he/she would rather not loose asset pledged as collateral for bad loan • Debtor decides not to burden co-signer with bad loan Note: This process requires a court hearing and debtors have 30 days to decide what they want to do. Creditors may no longer harass debtors once court proceedings are over.