DEBTS AND BANKRUPTCY Chapter 19

Debtor– a person or a business that owes money, goods, or services to another. Whatever is owed is generally called debt. The creditor is the one to whom the debt is owed. The creditor puts available capital (money) to work and is paid for this accommodation through interest. If either (debtor or creditor) fails to perform their contract as promised, both are likely to suffer some loss. Creditor can and do screen would be debtors for creditworthiness, and thus limits the defaults (those who don’t pay the loans back) to a tolerable level. Who are Debtors and Creditors?

Facilitates economic growth Provides more jobs for producers and more goods for consumers Protection makes creditors more secure when lending money or selling on credit and forbids unfair credit and collection practices Extension of credit:

Bad debt losses are shifted to other borrowers through higher fees and charges. 1. Laws Allowing Secured Debts A credit which holds a security interest in specific property is said to hold a lien. The lien gives the creditor the right in the case of a default to sell the property and use the proceeds from the sale to pay the debt. A pawn is a pledge of tangible personal property, usually of small size and comparatively high value. A pawn-broker lends money at interest and takes possession of tangible personal property from the borrower as security for repayment. When the debt together with interest due is paid, the pawn ticket is exchanged for goods. What Laws Protect Creditors?

Because thieves sometimes try to pawn stolen items a pawnbroker must be: 1. Licensed 2. Post a bond 3. Keep accurate records –available for police inspection  If stolen goods are found, they may be seized without compensation  There are maximum limits imposed on the rate of interest pawnbrokers may charge.  Pawned goods must be held by a pawnbroker for a time prescribed by law (four months is typical) before they can be sold. Pawnbroker

Mechanic’s lien – a person that has not been paid for labor or materials furnished to build a building or improve property may file a legal claim against the property. This person/business is entitled to sale proceeds before other claimants. Artisan’s lien – allows a person who has not been paid for services to retain possession of the item until it has been paid. Liens

Suretyship– a contractual relation in which a third party agrees to be primarily liable for the debt or obligation if payment or performance becomes overdue. Three parties are involved: The principal debtor, the creditor, and the surety – who promises to be liable if the principal debtor defaults. A guarantor is similar to a surety but a guarantor will not pay until after a lawsuit against the debtor proves the debt to be uncollectible. 2. Laws Involving Third Parties

Unsecured debt– only available when the debt is small or the credit standing of the borrower is very good. 4. Laws Allowing Garnishment of Wages The amount that can be garnished by all creditors is generally limited by the Consumer Credit Protection Act to 25% of the debtor’s take home pay. 3. Laws Concerning Unsecured Debts

1. Laws setting maximum interest rates 2. Requiring clear and complete advance disclosure of loan terms Consumer or personal loan is for a person that borrows money primarily for personal, family, household, or agriculture purposes. APR – the true equivalent annual interest rate. A credit sale contract must state: 1. The cash price of the item. 2. The down payment or trade-in allowance. 3. Itemized list of finance charges 4. The total amount to be financed Interest rates on home loans are usually comparatively low because loans tend to be high and can be protected by insurance What Laws Protect Debtors?

Any creditor violating the Truth in Lending Act may be fined, imprisoned, or both.  The violator must also pay the debtor twice the finance charge plus court costs and attorney’s fees. Leasing  A big advantage is that it requires no down payment  In the end, the total price paid in leasing is usually higher than a cash or credit purchase.  The Federal Consumer Leasing Act extends the protection of the Consumer Credit Protection Act to consumer leases. What Laws Protect Debtors? (cont.)

An unconscionable contract is one that is grossly unfair or oppressive, not illegally but unethical and one party is at the mercy of the other party. A judge my determine a contract is unconscionable and may: 1. Refuse to enforce the contract 2. Enforce the rest of the contract but remove the part that is unconscionable 3. Limit the contract to make it more fair 3. Laws Changing Unconscionable Contracts

Laws have been enacted to correct specific problems such as the relative inability of women to get credit, unfair debt collection practices, and inaccurate credit reports. The Federal Equal Credit Opportunity Act – makes it unlawful for any creditor to discriminate against an applicant because of sex or marital status. Laws Prohibiting Specific Abuses in the Credit System

The Federal Fair Debt Collection Practices Act.- makes the following abusive and deceptive debt-collection practices illegal. 1. Harassment of debtors 2. Threats of violence. 3. Contact with third parties 4. Communication with the debtor at work The Federal Fair Credit Billing Act.- provides the following protections to credit card holders. 1. Bills must be mailed at least 14 days before the due date, inquiries must be acknowledged within 30 days, and complaints settled within 90 days. 2. Repeated insistent letters demanding payment may not be sent. 3. Credit card holders may withhold payment... Over $50 made in the buyers state or 100 miles of the buyers home. Laws Prohibiting Specific Abuses in the Credit System (cont.)

The Federal Fair Credit Reporting Act.- A credit rating reflects the evaluation of one’s ability to pay debts.  Under the law, if credit is denied because of info. in a credit report  If an error is found in the report the credit report agency must correct it.  The disclosures and reports must be given to the applicant w/o charge Laws Requiring Notice of Debt Payment to be Recorded. 1. Debtors should always request receipts, especially when paying in cash. 2. A check that has been paid—returned to the bank—known as a cancelled check may serve as a receipt. 3. When a secured debt is paid in full, the law generally permits the debtor to record the fact in the public records. Laws Prohibiting Specific Abuses in the Credit System (cont.)

Laws Allowing Debtors to Cancel Most Debts and Start Over Discharge – the release of the debtor from debt Discharges through bankruptcy are available to a particular debtor only once every six years Record of bankruptcy stays on the debtor’s record for ten years. Congress has exclusive power to establish uniform laws on bankruptcies. Chapter 7 “Straight Bankruptcy” – involves the sale on nonexempt property of the debtor and proceeds are distributed to the creditors. Chapter 11 Reorganization of Business Firms– for businesses that are active business with no liquidation. Chapter 13 Proceedings– for either individuals or sole proprietorships Avoid liquidation of assets The debtor must have regular income Unsecured debts of less than $100,000 Laws Prohibiting Specific Abuses in the Credit System (cont.)

The issuer of the card specifies the limit of available credit, and before a large sale is made, the seller can contact the issuer to determine if this limit has been exceeded. Under federal law, a cardholder is also liable for unauthorized use of the credit card by another person—this liability is limited to $50. If a cardholder fails to make their payment he or she will be required to pay interest (often a very high rate) or finance carrying charges. Some states set limits on interest rates that may be charged—but they are still high. Downside of credit cards—may cause a significant increase in what is purchased. Using Credit Wisely Be accurate and honest when applying 2. If property is given as security Know and exercise your rights when it comes to credit 4. Be cautious when entering into a credit agreement 5. Get a detailed written estimate... What special laws apply to credit cards and their use?