Chapter © 2010 South-Western, Cengage Learning Problems with Credit Solving Credit Problems Bankruptcy as an Option 19

© 2010 South-Western, Cengage Learning SLIDE 2 Chapter 19 Lesson 19.1 Solving Credit Problems GOALS Discuss good credit management rules and warning signs that you are overextended. List sources of credit advice. Explain how to avoid credit scams.

© 2010 South-Western, Cengage Learning SLIDE 3 Chapter 19 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.

© 2010 South-Western, Cengage Learning SLIDE 4 Chapter 19 Danger Signs - pg. 419 You pay for everything with credit. You often pay late or at the end of the grace period. You often pay one credit card by shifting the balance to another. You worry about how you will be able to pay your bills. You recognize that if an emergency arises, you would have inadequate unused credit to take care of it.

© 2010 South-Western, Cengage Learning SLIDE 5 Chapter 19 Danger Signs Your credit cards are all near the limit. Your credit card companies are raising the interest rates because of late payments and charges that have exceeded your credit limit. You must time your payments carefully because otherwise you would not have enough income to pay your bills. You skip some payments in order to make other payments. Your credit rating is falling because you have too much credit. (continued)

© 2010 South-Western, Cengage Learning SLIDE 6 Chapter 19 Sources of Credit Advice If you find you still need help to get back on your feet, credit advice is available from several reliable sources. Be aware, however, that some sources will try to take advantage of you and leave you worse off than you were before.

© 2010 South-Western, Cengage Learning Sources of Advice Credit Counseling available from nonprofit, government- sponsored, or commercial credit counseling services. Debt Management Plan giving money each month to a credit counseling organization SLIDE 7 Chapter 19

© 2010 South-Western, Cengage Learning SLIDE 8 Chapter 19 Debt Negotiation Debt negotiation programs are not the same as debt management or credit counseling. With a debt negotiation program, a company you hire will call your creditors on your behalf and negotiate reductions in the amounts you owe.

© 2010 South-Western, Cengage Learning SLIDE 9 Chapter 19 Debt Adjustment People who are in deeper credit trouble than advice can solve often go to a finance company for debt adjustment. Debt adjustment is the formal process of taking over your debt situation for a period of time, after which you will be free of debt. Two types: Debt Adjustment Service Plan Debt Consolidation Loan

© 2010 South-Western, Cengage Learning SLIDE 10 Chapter 19 Credit Scams Promises and guarantees See what to beware of on the top of p. 424 Gold and platinum cards Watch for promotions of these card at the bottom of p. 424

© 2010 South-Western, Cengage Learning SLIDE 11 Chapter 19

© 2010 South-Western, Cengage Learning SLIDE 12 Chapter 19 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.

© 2010 South-Western, Cengage Learning SLIDE 13 Chapter 19 Bankruptcy Laws and Their Purpose Bankruptcy law in the United States has two goals. The first is to protect debtors by giving them a fresh start, free from creditors’ claims. The second is to give fair treatment to creditors competing for debtors’ assets.

© 2010 South-Western, Cengage Learning SLIDE 14 Chapter 19 Major Causes of Bankruptcy Job loss Emotional spending Failure to budget and plan Catastrophic injury or illness

© 2010 South-Western, Cengage Learning SLIDE 15 Chapter 19 Types of Bankruptcy Involuntary bankruptcy - creditors file a petition with the court, asking to declare you bankrupt. Voluntary bankruptcy - file a petition with a federal court Ch. 11 bankruptcy – for businesses Ch. 7 bankruptcy – individual – wipe debt Ch. 13 bankruptcy – ind. - reorganization

© 2010 South-Western, Cengage Learning SLIDE 16 Chapter 19 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.

© 2010 South-Western, Cengage Learning SLIDE 17 Chapter 19 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.