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 GPS Students 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.

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 /index.html How to choose a consumer credit counseling service-not all are the same? How -to-choose- a-credit-counseling - service  Choose a bankruptcy attorney. You must do this legally: _Choose- bankruptcy- attorney.htmlwww.ehow.com/how_ _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:  bankrutcyBasics.html 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 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 Bankruptcy Chapter 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.