Chapter 8.4 Managing Your Debts

Objectives Describe options for managing debt problems. Identify signs of debt problems.

Scenario: What is wrong with this picture? Carl Reynolds is a recent college graduate with a steady job earning $40,000 per year. With the latest model sports car parked in the driveway of his new home, Carl appears to have the ideal life. However, Carl is deeply in debt. Almost all of his income is tied up in debt payments. The bank has already begun foreclosure proceedings on his home, and several stores have court orders to repossess all of his new furniture and electronics. Brainstorm: Where does Carl go from here? How could he have avoided this situation?

Signs of Debt Problems Warning signs of being in financial trouble: How do you know when you are getting in financial trouble? Warning signs of being in financial trouble: You make only the minimum monthly payment on credit cards. You struggle to make the monthly payments on your credit bills. The total balance on your credit cards increases every month. You miss loan payments or often pay late.

Signs of Debt Problems You use savings to pay for necessities such as food and utilities. You receive second or their payment due notices from creditors. You borrow money to pay off old debts. You exceed the credit limits on your credit cards. You have been denied credit because of a bad credit report If you are experiencing two or more of these warning signs, it is time for you to rethink your priorities.

Debt Collection Practices Are debt collection practices regulated by laws? Creditors will often turn their bad debts over to debt collection agencies. Fair Debt Collection Practices Act (FDCPA) Enforced by the Federal Trade Commission (FTC) Prohibits certain practices by debt collectors. Does not erase legitimate debts Controls the ways debt collection agencies do business and deal with debt

Financial Counseling Services What are sources of financial counseling? Several options if you are having trouble paying your bills: Contact your creditors to try and work out an adjusted payment plan Contact a financial counseling program Consumer Credit Counseling Service

Brainstorm: Conspicuous Consumption Fancy cars and big houses do not necessarily reflect financial health. How could using credit for these things endanger your financial future?

Document Detective: A Credit Card Statement Worksheet page 261 Record the ‘Review Key Concept’ Questions in your notes packet

Declaring Personal Bankruptcy Why do people declare personal bankruptcy? Bankruptcy is a legal process in which some or all of the assets of a debtor are distributed among the creditors because the debtor is unable to pay his or her debts. May include a plan for the debtor repay creditors. Severely damages your credit rating.

Scenario: The New Face of Bankruptcy Patricia, a 43-year-old freelance photographer from California, was never in serious financial trouble until she began running up big medical costs. She reached for her credit cards to pay the bills. Because Patricia did not have health insurance, her debt soon reached $17,000 – too much to pay off with her $25,000-a-year income. Her solution was to declare personal bankruptcy and enjoy the immediate freedom it would bring from creditors’ demands. What are your thoughts about Patricia’s actions?

The U.S. Bankruptcy Act of 1978 You have two choices when declaring personal bankruptcy: Chapter 7 (a straight bankruptcy) Chapter 13 (a wage-earner plan bankruptcy) Both choices are undesirable and neither should be considered an easy way to get out of debt.

CHAPTER 7 BANKRUPTCY An individual must draw up a petition listing all assets and liabilities. A person who files for relief is called the debtor. The debtor must submit a petition to the U.S. district court Most but not all debts are forgiven. Assets are sold to pay off creditors. Some receive protection (SS payments, unemployment, home value, vehicle household goods, and appliances)

Brainstorm: U.S. Bankruptcies Since the mid-1980s, the number of personal bankruptcies has increased. Bankruptcies decreased after the Bankruptcy Abuse Prevention and Consumer Protection Act was passed in 2005. What factors may have contributed to the rise in bankruptcies?

CHAPTER 13 BANKRUPTCY A debtor with a regular income proposes a plan to the court for using future earnings or assets to eliminate his or her debts over a specific period of time. Debtor usually keeps all of his or her property Up to 5 years

The Bankruptcy Abuse Prevention and Consumer Protection Act 2005 signed by President George W. Bush The law required that: The director of the Executive Office for U.S. Trustees develop a financial management training curriculum to educate individual debtors on how to better manage their finances; and test, evaluate, and report to Congress on the curriculum’s effectiveness. Debtors complete an approved instructional course in personal financial management. The clerk of each bankruptcy district keeps a list of credit counseling agencies and courses on financial management. The law made it more difficult for consumers to file Chapter 7 and forced them to move into a Chapter 13 repayment plan

Effects of Bankruptcy Some find it more difficult to obtain credit and some find it easier Kept on file in credit bureaus for 10 years Should only be filed once all other options have been exhausted