8-2 Learning Objectives LO 8-1 Examine the early warning signs of financial trouble and learn how to avoid mistakes that can lead to financial crisis. LO 8-2 Discover how little changes in your spending habits can make a big difference in your financial well-being. LO 8-3 Create a workable plan to become debt-free and in control of your finances.
8-3 Learning Objectives, ctd. LO 8-4 Describe options for protecting your credit if at risk of foreclosure. LO 8-5 Identify when bankruptcy is a viable option and know the consequences and how to restore your credit afterward.
8-4 Early Warning Signs of Financial Trouble
8-5 Red Flag Warnings
8-6 Emergency Fund Refuge Keep at least $1,000 in an emergency fund Once established, save a minimum of 6 months income in an emergency account It takes discipline and hard work! Log spending habits Create balance sheets Create balance sheets Create income statements Create a budget
8-7 Stopping Little Leaks Assess necessary vs. nonessential spending Trim expenses Move to a less expensive apartment or house? Refinance your mortgage? Save money on gas or give up a car altogether? Live with only one car? Get a better price on insurance? Call around and make sure you are getting the best price you can? Consider taking a higher deductible? Drop a land line? Save money by calling over the Internet? Live without cable or satellite TV? Cut down on your utility bills? Cut down on eating out? Take sack lunches? Buy food in bulk? Start using coupons? FEED THE PIG
8-8 Tips for Stopping Little Leaks Cut coupons, shop sale items, make a list and only buy necessities Make shopping more difficult Put your credit cards on ice Change everyday habits Cut out convenience foods Pack your lunch Return unwanted purchases Avoid the malls when bored or depressed Read up on voluntary simplicity or thriftiness
8-9 Paying Yourself First Extra cash flow from stopping leaks goes toward a savings account Directly deposited into an account so you do not miss it Deposit into your savings account is as important as all your other bills Pay yourself first: Make a commitment to your future financial fitness
8-10 Steps to Digging Out of Debt
8-11 Don’t Buy Stuff You Cannot Afford Saturday Night Live Skit
8-12 Doing the Math
8-13 Debt Consolidation Help via Online Calculators: /calculator/index /calculator/index
8-16 Consumer Protection and Debt Collection Under the Fair Debt Collection Practices Act, collectors cannot do the following: Call before 8:00 a.m. or after 9:00 p.m. Call at work if you ask them not to Harass you, use obscene or profane language, or threaten the use of violence or other criminal means to harm you, your reputation, or your property Conceal his or her identity on the phone Lie or falsely imply that you have committed a crime Disregard a written request from you to cease further contact Falsely represent the amount, character, or legal status of debt Continue to contact you if you ask them in writing to stop
8-18 Temporary Solutions Reinstatement: A temporary solution to the risk of foreclosure that involves re-establishing a loan if terms of a new agreement are met Forbearance: Temporary reduction or suspension of your mortgage payments for 3 or 4 months, followed by a new repayment plan for the loan Repayment plan: Your lender may agree to a plan that includes regular monthly payments plus a portion of the past due payments each month until current
8-19 Long-Term Solutions Loan modifications: Lender rewrites the terms of the mortgage loan so monthly payments are affordable (by extending the time to repay or changing interest rate). May have to pay processing fee; if you have an FHA-approved loan, special loan modification programs may be available. Partial claim: Some insurers provide a one-time, interest-free loan to bring an account up-to-date. The interest-free loan is due when you refinance, pay off the mortgage, or sell the property.
8-20 Cramdown An arrangement in which the mortgage terms are altered in an attempt to keep the borrower from foreclosure. oard_cramdowns.m4v
8-21 S ALE OF H OME Sale: Lender will usually give you a set amount of time to find a buyer and pay off your mortgage. Keep in good communication throughout the process Short Sale: When a residential property cannot be sold for the full amount of the loan and the lender accepts the selling price as satisfying the mortgage Deed-in-lieu of Foreclosure: An arrangement whereby property is given to the lender in return for forgiveness of the balance of the mortgage Assumption of Loan: Lender may grant that a qualified buyer be allowed to assume (take over) your mortgage
8-22 Pre-foreclosure Process
8-23 Process of Foreclosure
8-24 Types of Bankruptcy Bankruptcy: A legal procedure for dealing with debt problems; specifically, a case filed under one of the chapters of Title 11 of the United States Chapter 7: Quickest and simplest form of bankruptcy; the liquidation of assets with the proceeds distributed to the creditors Chapter 13: A reorganization bankruptcy, where the debtor proposes a plan of reorganization to keep his/her assets and pay creditors over an extended time period, usually three to five years
8-25 Definitions of Bankruptcy Liquidation: A sale of a debtor’s nonexempt property and the distribution of the proceeds to creditors Wage Earner Bankruptcy: Chapter 13 bankruptcy for individuals with a regular source of income Means Test: To file Chapter 7, your income must be below your state’s median income
8-26 Counseling and Education Requirements Mandatory prebankruptcy credit counseling Evaluation of your personal financial situation, a discussion of alternatives to bankruptcy, and a personal budget plan Post-filing debtor education Budgeting, managing money, using credit wisely Must present certificate of completing a debtor education course to have your debts discharged Only credit counseling organizations and debtor education course providers that have been approved by the U.S. Trustee Program may issue these certificates
8-27 Consequences of Bankruptcy Moral and Social Consequences of Bankruptcy
8-28 In the News 1. What responsibility do you believe the lending institutions had in this situation? 2. What is your position on the federal court ruling and why?
8-29 Life After Bankruptcy
8-30 Learn LO 8-1 Examine the early warning signs of financial trouble and learn how to avoid mistakes that can lead to financial crisis. LO 8-2 Discover how little changes in spending habits can make a big difference in your financial well-being. LO 8-3 Create a workable plan to become debt-free and in control of your finances. LO 8-4 Describe options for protecting your credit if at risk of foreclosure. LO 8-5 Identify when bankruptcy is a viable option and know the consequences and how to restore your credit afterward.
8-31 Plan & Act Check for early warning signs of financial troubles (Worksheet 8.1) Using your balance sheet from Chapter 3, derive a minimum emergency fund balance you should strive for (Worksheet 8.2) Using your Every Penny Counts Spending Journal from Chapter 3, identify saving opportunities where you could reallocate savings toward your emergency fund (Worksheet 8.3) Create a debt priority pay-off plan (Worksheet 8.4)
8-32 Evaluate “If you can control the person in the mirror, you can be skinny and rich.” ~ Dave Ramsey Review your online GoalTracker. Record newfound savings opportunities from the worksheets to help build momentum for reaching your goals. Identify the current balance of your emergency fund and methods to grow the fund to a safe balance.
8-33 Continuing Case: Budget Karri, about to graduate, new job $32,000/year $10,000 in credit card debt $15,000 in student loans (payments of $180/month will begin 6 months after graduation) 1. What advice would you give Karri so she can build an appropriate emergency fund? 2. Create a realistic budget for Karri.