Lesson C: How Did I Get Into This Situation

Sources of Debt

Let’s start with some of the common reasons why consumers get into debt.

Easy Access to Credit

Credit card offers are targeted to nearly every type of consumer. These offers generally give the illusion that a consumer will get something for nothing.

Easy Access to Money

Having a credit card handy will give you immediate access to cash via a cash advance. These advances often come with very high interest rates.

Consumer Culture

The media plays a major role in influencing spending patterns.

Changing Technology

As technology changes, consumers are sold on the premise that they must have the latest and greatest of everything.

Lack of Financial Literacy

Many consumers do not understand the aspects of personal finance. Without this knowledge, these individuals fail to evaluate credit card offers properly, calculate the total cost of loans, and make important decisions that effect personal credit.

Financial Setbacks

These include loss of income, medical emergency, death in the family, or other unexpected cost. These setbacks should be covered by savings. However, today’s statistics show that consumers are not saving.

Overspending

Statistics show that 1/3 of consumer bankruptcies filed cited overspending as the culprit.

Debt Warning Signs

The following are signs that you may be in too much debt:

1. You don't have any savings.
2. You make minimum payments on your credit cards.
3. You use credit cards for things you normally buy with cash, such as groceries.
4. You use increasing amounts of your total income to pay off debts.
5. You have more than two or three major credit cards.
6. After you pay your credit card bill, you increase your balance by the same amount (or more) the following month.
7. You're at or near your credit limit on your credit cards.
8. You count on the float in order to pay your bills, writing a check hoping that you'll be able to cover it by the time it clears your bank.
9. You're unsure of the total amount you owe on all your debts.
10. You take out cash advances on your credit card to pay other bills.
11. You've tried to make a purchase with your credit card and have been declined.
12. You've been denied credit.
13. You bounce checks.
14. You get calls from collectors.
15. You lie to your spouse or other family member about your spending or hide credit card statements from family members.

How to Get Out of Debt

You have many options to resolve your debt. The route you choose will depend on your individual circumstances. Below are some possible ways to eliminate debt.

Consumer Workouts

These occur when the consumer contacts the lender directly and attempts to negotiate an agreed upon arrangement for payment. This may be difficult for some consumers who have seriously delinquent accounts. If this is your case, you can seek the assistance of a credit counselor for help with a viable workout both the consumer and the creditor can agree upon.

Debt Consolidation Loans

Debt consolidation loans give consumers the ability to pay off their high-interest accounts typically through lowered monthly payments. However, the term of the loan agreement is usually longer and may be at a higher interest rate. Since a consumer must “credit qualify” for this type of loan, severe credit delinquencies will not make this a viable option.

Home Equity Loans

Consumers have the option to pay off debt using home equity. This could be beneficial if you are committed to paying off the debt by making consistent payments. However, if you have had past credit problems, this may not be the best option. Using home equity to pay off credit cards is like trading unsecured debt for secured debt. If you default on this type of loan you are at risk of losing your home.

Balance Transfers

This is the option least recommended. Taking your unpaid balance(s) and transferring them to 0% card can be tricky. Often times the 0% rate is introductory for a period of six to twelve months. Once the introductory period expires, your rate can go up as high as 29%. Also, this rate generally applies to the transferred balance only. New purchases may have a much higher rate.

Credit (Budget) Counseling

Consumers who are experiencing budgeting problems can benefit from credit (budget) counseling. Credit Counselors can assist you with developing a spending plan and encourage you to stay on track. They may also contact your creditors to negotiate easier payment terms on your behalf.

Debt Negotiation (Settlements)

This may be a good option for consumers with seriously past due accounts and wants to avoid bankruptcy. There may be a period of increased collections activity and further damage to your credit report while settlement arrangements are being negotiated. If most your accounts are not charged off, this option is not recommended.

Bankruptcy (The Last Resort)

Although most people view bankruptcy as a cure all to a bad situation, it is not. Bankruptcy can be a costly procedure that can cause serious damage to your credit score. Moreover, several of your debts may not be discharged in a bankruptcy filing. Below is a listing of the three types of bankruptcies.

Chapter 7

This bankruptcy absolves the consumer from any debt filed under it. It allows an individual to discharge all unsecured debt. However, the consumer’s property can be liquidated under the terms of the law. Once the bankruptcy is discharged you will not be responsible for any debt filed under it. A Chapter 7 bankruptcy remains on a consumer report for 10 years.

Chapter 13

This bankruptcy is designed for consumers who desire to reorganize their debts while seeking court protection during the negotiation with their creditors. Chapter 13 is recommended for consumers with a small amount of debt. Under this bankruptcy, you will arrange to pay back all or part of your debts over a 3-5 year period of time. A discharged Chapter 13 bankruptcy will remain on your consumer report for 7 years. If the bankruptcy is dismissed (meaning you did not follow through) it will remain for a period of 10 years.

Chapter 11

This type of bankruptcy is similar to a Chapter 13 however it is structured for business reorganization.

Debts That Will Not Be Discharged

• Taxes
• Student Loans
• Debts from a Prior Bankruptcy
• Spousal or Child Support
• Criminal Fines and Penalties
• Liability from Driving While Intoxicated
• Debts arising out of willful or malicious conduct
• Credit charges made within 40 days of filing
• Money owed to an individual as a result of intention harm done to them
• Any possession converted to exemplary assets within 90 days of filing

Exercise

Quiz

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