Problems with Credit

1. 19 Problems with Credit

2. 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. Chapter 19

3. A Credit Payment Plan • A credit payment plan is a record of your debts and a strategy for paying them off. • List all debts, with enough information to analyze which ones should be paid off first. • Focus on paying one off at a time, while making only minimum payments on others. • As one gets paid off, shift your focus to the next priority. • A credit payment plan works best when you are responsible and do not incur new debt. Chapter 19

4. Legal Recourse • When credit problems arise that cannot be solved by your own actions or through assistance, the final step for relief is bankruptcy. • When you are bankrupt, you are unable to meet your bills. Chapter 19

5. 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. Chapter 19

6. Bankruptcy Laws and Their Purpose • Bankruptcy law in the United States has two goals. • The first is to protect debtors (people who owe money) by giving them a fresh start, free from creditors’ claims. • The second is to give fair treatment to creditors competing for debtors’ assets. Chapter 19

7. About Personal Bankruptcy • Bankruptcy is a court proceeding. • Bankruptcy remains on your credit report for 10 years. • Each debt that was discharged under the bankruptcy petition (such as credit card accounts) may remain on your report for seven years. • You should hire an attorney to file bankruptcy.

8. Bankruptcy Laws and their Purpose • Bankruptcy law in the U.S. has two goals: • Protect a debtor by giving them a fresh start, free from creditors’ claims. • Give fair treatment to creditors competing for a debtor’s assets. • Bankruptcy laws treat two general classes of debt: secured and unsecured. Chapter 19

9. Class of Debt • With secured loans, the debtor has pledged specific assets as collateral for payment. • If the debt is not paid, the creditor can repossess the asset that has been pledged. • For unsecured debt, no specific asset is pledged, but all of the debtor’s resources are considered in a bankruptcy action. Chapter 19

10. Types of Bankruptcy • Chapter 11 bankruptcy • Chapter 7 bankruptcy • Chapter 13 bankruptcy Chapter 19

11. Chapter 11 • A reorganization form of bankruptcy for businesses that allows them to continue operating under court supervision as they repay their restructured debts. • Existing management retains control of a business unless a trustee is appointed by the court. • The trustee is a person who will oversee the assets of the business and file court reports. • The main purpose: reorganize their debt structure Chapter 19

12. Chapter 7 Bankruptcy For individuals, there are two basic ways to file bankruptcy: Chapter 7 or Chapter 13. • Chapter 7 Bankruptcy is a liquidation form of bankruptcy for individuals. (Commonly called straight bankruptcy.) • Debtors must give up all their property except for certain exempted items. • The advantage of Chapter 7 bankruptcy is immediate debt relief. • Recent bankruptcy laws make it more difficult for a person to qualify for straight (liquidation) bankruptcy. Chapter 19

13. Exempted Property • Exempted property is an asset or a possession that the debtor is allowed to keep because it is considered necessary for survival. • Federal and State laws allow a number of items to be exempted such as: • Some equity in a home • $3,200 for a motor vehicle • Items worth up to $200 each • Some jewelry/tools/books • Proceeds from life insurance; unemployment; pensions Chapter 19

14. To file bankruptcy you must also provide: • a copy of your latest tax return for a Chapter 7. • past 4 years’ tax returns for a Chapter 13. • a certificate of credit counseling. • evidence of earnings in the past 60 days. • monthly net income and any anticipated increase in income. • a photo ID.

15. The Court appoints a trustee • The trustee arranges for the sale of your non-exempt property and is responsible for paying as many of your debts as possible with the proceeds. • Not all debts can be erased by bankruptcy.

16. Chapter 13 Bankruptcy • Chapter 13 bankruptcy is a reorganization (payment plan) form of bankruptcy for individuals. • It allows debtors to keep most of their property and use their income to pay a portion of their debts over three to five years. • Under Chapter 13, often referred to as the wage-earner’s plan, some debts are totally discharged, but family obligations still remain for childsupport and alimony. Chapter 19

17. Key points • You can only file bankruptcy under one category at a time. • Chapter 7 offers a financial fresh start and is a quicker process compared to a Chapter 13. • A means test will determine if you are eligible to file Chapter 7 or repay part of your debt under a Chapter 13. • Pre-bankruptcy credit counseling and pre-discharge debtor education are bankruptcy requirements. • Chapter 7 can be filed only once every eight years. • You cannot file Chapter 13 if you obtained a bankruptcy discharge in the past 2-4 years.

18. Repercussions of Bankruptcy • When you file Chapter 7 bankruptcy, all your property except exempt assets will be sold to pay your creditors. • An exempt asset is property you are allowed to keep during bankruptcy. • If you file a Chapter 13 repayment plan, it will take three to five years to repay your debts and receive your discharge from the court.

19. Bankruptcy will not remove: • Child support and alimony • Debts for personal injury or death that you caused while under the influence of alcohol or illegal drugs • Student loans • Fines and penalties for law violations, such as traffic tickets, court-ordered payments or recent property tax assessments. • Income taxes from the past three years and other tax debts • Credit purchases of $1,150 or more for luxury items within 60 days of filing (continued)

20. Bankruptcy will not remove: (continued) • Loans or cash advances of $1,150 or more taken within 60 days of filing • Debts owed to a single creditor of more than $500 for luxury goods purchased within 90 days of filing • Cash advances of $750 made within 70 days of filing • Debts or judgments based on fraud or other illegal activities • Criminal restitution resulting from illegal activities • Debts you owe from a divorce decree or settlement • Any debts you forgot to list in your bankruptcy filing

21. Key Points • Bankruptcy remains on your credit report for up to 10 years • This can make it difficult to get new credit, find a place to rent, get insurance or qualify for some jobs • Unless you change your financial habits after you file bankruptcy, you might fall into debt again

22. To Declare, or Not to Declare? • Bankruptcy is not a way to avoid debts you can afford to pay but just don’t want to pay. • Bankruptcy will not allow you to keep your house and cars if you have a mortgage or car loan unless you pay your creditors. • Bankruptcy will immediately stop most collection efforts against you. • Creditors can’t take further action against you unless they obtain permission from the bankruptcy court.

23. Major Causes of Bankruptcy • Business failure / Job loss • Emotional spending • Failure to budget and plan • Catastrophic injury or illness Chapter 19

24. 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. Chapter 19

25. 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. Chapter 19

26. Credit Cards • Will I be able to get a new credit card? • You might have trouble getting a regular credit card, but you will probably qualify for a secured credit card if you put money in a savings account to guarantee the card.

27. Banking • Can I open a bank account? • Unless you have abandoned a bank account while owing money, bounced checks you never paid back or had a bank account closed on suspicion of fraud, you should have no trouble opening a new bank account subsequent to filing bankruptcy.

28. Current Employment • Will bankruptcy affect my job? • The Bankruptcy Code specifically prohibits employers from discriminating against current employees who file bankruptcy. • The law applies to private and government employers.

29. Looking for work • If you look for a new job while the bankruptcy is still listed on your credit report, potential employers may choose to reject you. • There is no law to prevent this from happening.

30. Re-establishing Credit • A Chapter 7 bankruptcy will stay on your credit report for 10 years. • Home and auto loan and credit card applications may ask if you’ve declared bankruptcy, and your answer may be a factor in the lender’s decision. • You may be able to qualify for a mortgage or car loan at a higher-than-average interest rate. • You should be able to qualify for a secured credit card if you deposit money in a bank account to guarantee the card.