Chapter
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.
 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 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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SLIDE 3
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?
 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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SLIDE 5
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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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
Purpose
Bankruptcy law in the U.S. has two goals:
1. Protect a debtor by giving them a fresh
start, free from creditors’ claims.
2. 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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SLIDE 8
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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SLIDE 9
Types of Bankruptcy
Chapter 11 bankruptcy
Chapter 7 bankruptcy
Chapter 13 bankruptcy
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SLIDE 10
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
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 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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SLIDE 13
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.
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 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 child support and alimony.
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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.
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.
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)
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
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
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
Business failure / Job loss
Emotional spending
Failure to budget and plan
Catastrophic injury or illness
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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
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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SLIDE 25
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.
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.
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.
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.
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.