Debt Management Unit VIII: Banking and Credit Lesson 5

Financial Consequences of Debt  Debt could put you in a state of overspending and perpetual debt, where you get used to carrying a balance and paying extremely high interest rates  Could adversely affect your credit rating, which makes getting loans when you really need them more difficult

Debt Management Strategies  Call creditors  Pay on time  Pay in full  Close unnecessary credit card accounts  Notify credit card company immediately when faced with payment problems

Consumer Credit Counseling Services  Consumer Credit Counseling Services provide nonprofit credit counseling, debt management plans, debt consolidation and financial and educational services to consumers nationwide

Consolidation of Loans  Consolidation of loans is the combining of several unsecured debts into a single, new loan that is more favorable  Debt consolidation involves taking out a new loan to pay off a number of other debts  The new loan may result in a lower interest rate, lower monthly payment or both

Bankruptcy  Bankruptcy: a term for a federal court procedure that helps consumers and businesses get rid of their debts and repay their creditors  In most cases, an individual files for bankruptcy voluntarily. However, creditors can force debtors into involuntary bankruptcy

Bankruptcy  The most common causes of bankruptcy are:  Illness or injury, failure to plan and budget, small business failure, job loss, impulse spending, economic downturn  An attorney should be consulted for legal advice on when and how to file for bankruptcy

Bankruptcy Chapters  Chapter 7: The chapter of US Bankruptcy providing for liquidation (sale of a debtor’s property and distribution of proceeds to creditors)  Chapter 11: The chapter of US Bankruptcy that provides for reorganization of debt for a corporation or partnership (still get to keep business and pay off debt over time)  Chapter 13: The chapter of US Bankruptcy for adjustment of debts of an individual with regular income  A debtor can keep property and pay debts over time, usually three to five years

How Bankruptcy Works  When you can no longer keep up on your debts and considering bankruptcy you can find a bankruptcy attorney  Prepare Bankruptcy petition and amass supporting documentation to file  Go to a bankruptcy hearing run by a bankruptcy official (trustee)  If not approved, you have the option to re-file and provide additional documents  See if you are discharged

Bankruptcy in Credit Report  Bankruptcy is not a get out of jail free card, it has a negative effect on your credit score  Bankruptcy will stay on your credit report for 7-10 years and will make it extremely hard to get financing again  Bankruptcy should only be an option if the circumstances are incredibly poor