Chapter 16.1Getting Unstuck

20/10 RuleTotal borrowing should not exceed 20% of

annual take-home pay.Monthly Credit payments should not exceed

10% of monthly take-home pay.

Note – This does not include monthly payments made on a mortgage (a loan on a house).

Credit CounselingWhere can you go for help?

CCCS (Consumer Credit Counseling Service)(Part of the NFCC (www.nfcc.org)(National Foundation for Consumer Credit)

Churches, private foundations, credit unionsmilitary bases, universities, federal housing

authorities….also provide help.

These will help you set up a budget, get a loan, help you get better rates from your lenders, and set up better payment plans.

Debt AdjustmentsDebt-Adjustment Service Plan

Debt Consolidation Loan

Finance company takes over your checkbook and pays your bills for 3 to 5 yrs.

Must have sufficient monthly income to be eligible for this type of help.

You are given a monthly allowance

You receive help in budgeting and credit cards are taken away and slowly given back

Finance Company loans you money to pay off your debts.

You make one payment a month to Finance Company until your debt is paid off.

Must have collateral to secure money loaned to you.

Credit RepairOnce your credit rating has been damaged,

what can you do to repair it?Obtain copy of your credit report and challenge

incorrect informationStart using credit more responsiblyBegin paying off your debts through Credit

Counseling or Debt Adjustment or bothAvoid using credit card or only charge small

amounts that can be paid off every month

Beware! Credit Scams Abound!You may find many pop-ups on the internet

regarding counseling, adjustment, or repair.Look-out for promises that commit to paying

off your house and require signatures Watch for requests that require a fee prior to

the credit service (by law, finance companies may not charge until promised service has been performed)

Beware! Credit Scams Abound!Look-out for programs that suggest you give

your social security number in setting up a new credit report.

Watch-out for programs that suggest you not contact the credit bureau and those that avoidtelling you your legal rights.

BankruptcyClaiming bankruptcy relieves the debtor of

of the responsibility of paying their debts or protects them while they try to pay off their debts.

Bankruptcy is a second chance, but carries serious consequences.

2 Classes of Debt Treated by BankruptcySecured UnsecuredLoans backed by specific

assets that debtor pledged as collateral to assure repayment

Loans that is not backed by pledged assets. In Bankruptcy, most of debtor’s resources may be used to repay this kind of debt.

Involuntary Creditor files a petition against you to the court.. Not very common

Voluntary You file a petition to the court. Most Common

Liquidation Court sells debtors assets and uses proceeds to pay as much of the debt as possible

Reorganization

Debtor keeps their assets but submits a plant o court for repayment of most of their debt

The 2 Ways Bankruptcy deals with debtors. See below.

Bankruptcy Can be Voluntary or Involuntary

BankruptcyFor Businesses For IndividualsChapter 11

Companies are allowed to continue operating under court supervision as they repay their restructured debt.

Chapter 7 Commonly called

“Straight Bankruptcy”. Uses “Liquidation” to

wipe out debt Debtors required to give

up all their property except of excepted items

Chapter 13 Commonly called “Wage-

Earners Plan” Uses “Reorganization” Uses Court-enforced

repayment plan Best plan for

reestablishing good credit rating but will take many years to recover

Note – In Chapter 13 Bankruptcy, Family obligations still remain for child support and alimony.

Reaffirmation of DebtDefinition: Agreement to repay discharged

debts.Why might someone want to reaffirm a previous debt?Debtor decides that he/she would rather not

loose asset pledged as collateral for bad loanDebtor decides not to burden co-signer with

bad loan

Note: This process requires a court hearing and debtors have 30 days to decide what they want to do. Creditors may no longer harass debtors once court proceedings are over.