Chapter 19 Problems with Credit

Solving Credit Problems The 20/10 Rule – Total borrowing should not be more than 20% of your yearly take-home pay Monthly payments should not exceed 10% of your monthly take-home pay

Credit Counseling Private and government-sponsored counseling service Small service fee may be charged Help set up a realistic budget Give advice how to stay within the budget National Foundation for Consumer Credit (NFCC) A consumer credit counseling service (CCCS)

Debt Adjustment Finance companies Service plan (4 steps) Take your paycheck and checkbook and make debt payments for you. You are given an allowance until all bills have been paid off. (3-5 years possible) Counsel you so that you understand how you got so far into debt and how to avoid doing so again in the future

Debt Adjustment Steps Continued Work with you to create a reasonable budget that you can live with. Cards taken away and given back slowly. Supervise your budget and help you make any needed changes or adjustment

Credit Repair If your rating is already poor – You can Obtain copies of your credit report Challenge incorrect information Respond to disputes Or, for a fee, a credit-repair company will do the above

Credit Repair Begin to use credit responsibly Start by paying off debts through credit counseling or debt adjustment Then make small purchases on your card and paying off the balance in full each month Repair is a slow process, it may take several years

Credit Scams Beware of offers that do the following Require you to pay a fee before performing any service Do not tell you your legal rights Suggest that you start a “new” credit report by applying for a new social security number or employer identification number (EIN) Recommend that you not contact the credit bureau yourself

Credit Scams By law, finance companies may not charge you until they have performed the promised services They must give you a copy of the “Consumer Credit File Rights Under State and Federal Law” before you sign a contract. Contract – Name, address, payments, total cost and services to be performed. Look for non-profit

Bankruptcy – What is it? Legal process that relieves debtors of the responsibility of paying their debts or protects them while they try to repay A second chance, but has serious consequences

Bankruptcy – Who’s Involved Debtors – the persons who owe money to others (insolvent) Courts – preside over the proceedings Lawyers – complicated system to navigate Creditors – the persons/businesses to whom the debt is owed

Types of Bankruptcy Voluntary - most common, debtor asks court to be declared bankrupt Involuntary – doesn’t happen very often, creditors must ask the court for this option

Types of Bankruptcy Chapter 11 – Reorganization form for businesses with intent to reorganize Chapter 7 – sometimes called straight bankruptcy- liquidation for individuals Chapter 13 – the wage-earners plan with intent to repay all creditor proportionally and retain as many assets as possible

Legal Advice Since Bankruptcy can be complicated it is best to consult an attorney to decide what your best course of action is and how it will impact you

Reaffirmation of Debts Creditors may ask debtors to repay debts even after they have been discharged Reasons May not want to saddle co-signer with the debt May not want items repossess, such as a car which you may need to get to work

Other Information Once you file for bankruptcy, you are not allowed to file again for 6 years Once filed, the judgment stays on your credit record for 10 years