DEBT

What are your options?

and

What can you do to prevent It?

Written by Kindra Watters

Georgia CTAE Resource Network

2010

FACS-CF-7 GPSStudents will analyze the impact of debt on personal finances.

a. Evaluate the causes of debt. b. Analyze options for debt resolution. c. Explore the cost and effect of

bankruptcy.

Lesson One

Standards: a. Evaluate the causes of debt.

What is Debt?

There are many definitions and names for debt…” up to my neck in debt” or “ I have broken the bank.”

Debt is as a part of the American lifestyles as birthdays are to each child.

The definition for debt by Webster's Dictionary: “a state of owing” or “the common- law action for the recovery of money held to be due.”

What are the causes of debt?

Many people differ on the “causes” of debt but when debt happens...you know it!

According to Bankrate’s top ten causes of debt:

#1-Reduced income and having the same expenses.

Example: A person is laid-off and

they do not make the same money they used to; however, they continue to spend money like they did when they were employed.www.bankrate.com

Other reasons?

#2 Divorce #3 Poor money

management #4 Underemployment #5 Gambling #6 Medical expenses

#7 Saving too little or not at all.

#8 No money communication skills in a marriage.

#9 Banking on a windfall. Seize the day of spending and not saving money ….for tomorrow I will worry about it!

#10

America’s Debt Picture

In 2008, Americans had over $972 billion in debt =

$8,000 per household.

Other Names that Describe Debt Include: Debt to income ratio-

This is what percentage of your income is debt and how do they compare to one another.

Debt free- Owing no debt to any creditor.

Creditor- The entity/place/person money is owed to.

Debt consolidation- All debt is “brought together” into one payment/bill.

Credit- Another word for debt. A creditor gives credit to the consumer, the consumer is now in debt to the creditor.

Bad Debt…

Bad Debt- is owing more money than you and you cannot pay your creditors.

Charge-off- This refers to the credit file and not paying on the account for several months. At this point the account is sent to collections and has been closed by the credit grantor.

Good Debt…Good Credit…Good Risk

Debt forgiveness- by an act or action the debt has been “cancelled” and it is considered “paid in full”.

In good standing….this is referring to the credit file-a file that contains how you pay your bills, how often you pay on time and similar things like this.

If you are in good standing, then you have good credit and are a good credit risk.

Lesson Two

Standards:

b. Analyze options for debt resolution.

c. Explore the cost and effect of bankruptcy

b. Analyze options for debt resolution.

Credit Counseling

Debt Consolidation

Bankruptcy

Reduced Payment

Typically, not for profit company that works with your creditors to reduce you amount of debt over a set period of years.

Allows all of the debt to be place in one payment. This has to be agreed upon by the company the debt is owed to.

The “last resort” when it comes to debt. There are three chapters and different conditions to each. The debt is monitored by the courts and the creditor is given their money in a “settlement” type of situation.

Paying a reduced amount to the creditor but not the full amount of what is owed. This could be monthly payment or the balance of the account.

Educating the consumer about credit.

Source: U.S. Courts website

Resources for debt resolutions.

Consumer Credit Counseling Video

www.wsbtv.com/video/23123667/index.html

How to choose a consumer credit counseling service-not all are the same?

www.howcast.com/videos/313450-How -to-choose-a-credit-counseling -service

Choose a bankruptcy attorney. You must do this legally:

www.ehow.com/how_4559462_Choose-bankruptcy-attorney.html

.

Personal Bankruptcy

Chapter 7 Personal debt relief Filed in U.S.

Bankruptcy court Liquidating Bankruptcy

The sale of a debtor’s nonexempt property and the distribution of the proceeds to the creditors.

Chapter 13 Individual Debt

Adjustments Allows the debtor to

keep property and pay debts over time, usually three to five years.

Source: U.S. Courts website

Business Bankruptcy

Chapter 11 Reorganize the business to keep the

business but pay off the creditors over time.

A good example of this: Air Tran and the repayment of their debt.

Source: U.S. Courts website

Resources for Bankruptcy:

www.uscourts.gov/video/bankrutcybasica/bankrutcyBasics.html

Explains the Basics of Bankruptcy Part 1- Introduction-covers terms Part 2-Types of Bankruptcy Part 3-Limits of Bankruptcy Part 4-Filing for Bankruptcy Part 5-Creditor’s Meeting

Source: U.S. Courts website

Videos from www.uscourts.gov Bankruptcy Link Part 6- Bankruptcy Crime Part 7-Court Hearings Part 8- The Discharge Part 9-Legal Assistance

Source: U.S. Courts website

Other Bankruptcies that are less common

Chapter 12- Family Farmer Bankruptcy

Chapter 9-Municipality BankruptcyChapter 15-Ancillary and other Cross the Boarder cases. Source: U.S. Courts website

Other information

The Fair Credit Reporting Act Fair Debt Collection Act SCRA-Service members Civil Relief Act SIPA-Securities Investor Protection Act

Effects of Bankruptcy

Job loss- Many employers require a background check that includes a credit check as a condition of hiring someone. If you have negative credit that includes a bankruptcy then many employers may not hire you.

Difficulty applying for credit- unfortunately, a bankruptcy could signal to creditors that you may be a credit risk. You could not pay your creditors-thus, filing the bankruptcy-before...this may happen again. It makes you a credit risk.