Problems with credit
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19. Problems with Credit. 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.

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Problems with Credit

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Problems with credit

19

Problems with Credit


The 20 10 rule

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.

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A credit payment plan

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.

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Legal recourse

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.

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What is bankruptcy

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.

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Bankruptcy laws and their purpose

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.

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Problems with credit

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.


Bankruptcy laws and their purpose1

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.

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Class of debt

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.

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Types of bankruptcy

Types of Bankruptcy

  • Chapter 11 bankruptcy

  • Chapter 7 bankruptcy

  • Chapter 13 bankruptcy

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Chapter 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

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Chapter 7 bankruptcy

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.

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Exempted property

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

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Problems with credit

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.


Problems with credit

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.


Chapter 13 bankruptcy

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.

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Problems with credit

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.


Problems with credit

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.


  • Problems with credit

    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

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    Problems with credit

    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


    Problems with credit

    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


    Problems with credit

    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.


    Major causes of bankruptcy

    Major Causes of Bankruptcy

    • Business failure / Job loss

    • Emotional spending

    • Failure to budget and plan

    • Catastrophic injury or illness

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    Advantages of bankruptcy

    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.

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    Disadvantages of bankruptcy

    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.

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    Problems with credit

    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.


    Problems with credit

    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.


    Problems with credit

    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.


    Problems with credit

    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.


    Problems with credit

    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.


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