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Chapter 39Chapter 39 Slide Slide 11
Debtors, Creditors, and Bankruptcy
39-139-1 Legal Protection of Creditors
39-239-2 Legal Protection of Debtors and Use of Credit Cards
39-339-3 Bankruptcy
CHAPTER 39
Lessons
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Chapter 39Chapter 39 Slide Slide 22
Legal Protection of Creditors
Discuss four types of laws that protect creditorsExplain how liens are createdExplain how liens can protect creditor’s rights
LESSON 39-1
GOALS
Chapter 39Chapter 39 Slide Slide 33
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Hot Debate
Norm drops his expensive watch off to be repaired
Told to come back tomorrowCalled on assignment to RussiaReturns 4 months later to pick up watch
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Legal reasons for Norm’s suit?
The store owner knew of Norm’s job and the uncertainty of his being anywhere tomorrow.
Such notice would prevent a sale under the normal timeframe of the law.
Chapter 39Chapter 39 Slide Slide 55
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Store’s reasons for selling the watch?
To cover their labor and parts expenditures
Chapter 39Chapter 39 Slide Slide 66
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LAWS PROTECTING CREDITORS
Laws allowing secured debtsPledges - Security for the payment of a debt
PLEDGOR – debtorPLEDGEE – creditor
Chapter 39Chapter 39 Slide Slide 77
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Pawn Shops
Pawn shops
How long must pawn shops hold your item(s)?
Pawn shops can only take tangible items
Chapter 39Chapter 39 Slide Slide 88
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Liens In the event of a default in payment,
the creditor has the right to sell the item held to pay the debt.
Two types of involuntary liens:
Mechanic’s Lien rights to property for labor/materials
homes, buildings, other real property
Chapter 39Chapter 39 Slide Slide 99
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Artisan’s Lien
right to possess property to ensure payment of the debtRepairing cars, hotel rentals
i.e. Mechanic can keep you automobile
until payment is received.
Chapter 39Chapter 39 Slide Slide 1010
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Laws involving third parties
S U R E T Y S H I PThird party assumes liability if the debtor
cannot pay. PrimarilyPrimarily liable
Principal debtor
CreditorSurety – oral contract can be sufficient (not legally
required), but should be in writing
Chapter 39Chapter 39 Slide Slide 1111
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Example of Right of Contribution
Chapter 39Chapter 39 Slide Slide 1212
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As a surety, what can you do if the debtor failed to pay and the money was collected entirely from you?
Sue the principal debtor
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G U A R A N T Y – SecondarilySecondarily liablePerson who assumes liability if the
debtor cannot pay.Creditor must first sue the debtor and
get a judgment that proves the account is uncollectable (unlike a surety)
Must be in writing (unlike a surety)
Chapter 39Chapter 39 Slide Slide 1414
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Laws concerning unsecured debts
Creditor is in a weak positionMust sue debtor for payment and obtain
judgmentCostly and time consumingDebtor may flee
Chapter 39Chapter 39 Slide Slide 1515
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Another way debt can be settled is by bankruptcy.
Secured creditors may sell the collateral and satisfy their claim before unsecured creditors collect a dime.
Chapter 39Chapter 39 Slide Slide 1616
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Laws allowing garnishment of wages
Limited to 25% of debtor’s take-home pay
Under the Consumer Credit Protection Act
arnishing
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Chapter 39Chapter 39 Slide Slide 1717
Legal Protection of Debtors and Use of Credit Cards
Discuss six types of laws that protect debtorsDiscuss the advantages and disadvantages of
using credit cards
LESSON 39-2
GOALS
Chapter 39Chapter 39 Slide Slide 1818
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LAWS PROTECTING DEBTORS
Laws setting maximum interest ratesLaws requiring disclosure of termsLaws challenging unconscionable contractsLaws prohibiting abuses in the credit systemLaws requiring notice of debt payment to be
recordedLaws allowing debtors to cancel debts and
start over
Chapter 39Chapter 39 Slide Slide 1919
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Usury Laws
States set interest limits (~ 30%)Limit only applies to “on time” charges
Chapter 39Chapter 39 Slide Slide 2020
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Personal, family, household, agricultural PERSONAL
LOANS
VS
Business Loans
Commercial Loans
Consumer Borrowing
Chapter 39Chapter 39 Slide Slide 2121
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Federal Truth in Lending Act
Consumer Credit Protection Act
Requires creditors to clearly and completely disclose loan terms, i.e. interest and finance charges
Chapter 39Chapter 39 Slide Slide 2222
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Schumer Box - format
Chapter 39Chapter 39 Slide Slide 2323
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What is a Finance Charge? total added cost when one pays in
installments for goods/servicesAPR – Annual Percentage Rate
Example: 1-1/2 month = 18% year
Loan amount $30,000
Finance amount 5,400
Chapter 39Chapter 39 Slide Slide 2424
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Chapter 39Chapter 39 Slide Slide 2525
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Credit Sales Contract
cash price down payment or trade-in allowance itemized list of all finance charges total amount to be financed
Chapter 39Chapter 39 Slide Slide 2626
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Home Mortgages
Interest tends to be low debt secured by home – collateral
Therefore Truth in Lending Act does not protect mortgages
Chapter 39Chapter 39 Slide Slide 2727
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Truth in Lending Act
** F I N E D **
** IMPRISONED **
OR BOTH!+ pay the debtor twice the finance charges
(no less than $100, not more than $1,000.)
+ court fees
+ attorney’s fees
Chapter 39Chapter 39 Slide Slide 2828
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LEASING
Popular trend b/c no down payment Total price paid in leasing:
higher than cash purchase higher than credit purchase
especially true for +5 yr owners
Consumer Leasing Act extends protection of Consumer Credit Protection Act to lessees (consumer who leases)
Chapter 39Chapter 39 Slide Slide 2929
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Chapter 39Chapter 39 Slide Slide 3030
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Unconscionable Contracts
grossly unfair, oppressive, unethical
Example:
A motorist (who has no mechanical knowledge) breaks down.
Car is towed to a mechanic.
Chapter 39Chapter 39 Slide Slide 3131
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Mechanics dictates the following terms: Labor ------------------- $2,000. ($900.)
Parts -------------------- 1,000. ($500.) Emergency Service -- 800. ($50.)
Judge may:-- refuse to enforce-- enforce without unconscionable clause-- limit the clause’s application so the contract is
no long unfair
Chapter 39Chapter 39 Slide Slide 3232
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No relief for:
overpriced items poor quality unneeded goods
Chapter 39Chapter 39 Slide Slide 3333
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LAWS PROHIBITING ABUSES IN THE CREDIT SYSTEM
Federal Equal Credit Opportunity ActFederal Fair Debt Collection
Practices ActFederal Fair Credit Billing ActFederal Fair Credit Reporting ActCredit Repair Organizations Act
Chapter 39Chapter 39 Slide Slide 3434
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Federal Equal Credit Opportunity Act
Prohibits inquiries about: sex or marital status birth control practices childbearing intentions/capability
opening an account in maiden name
credit information reported in both names (women in the past were denied credit upon husband’s death)
Chapter 39Chapter 39 Slide Slide 3535
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Federal Fair Debt Collection Practices Act
Debt Collection Abuses
-- harassment of debtors
-- abusive and profane language
-- threats of violence
-- contact with third parties (relatives, friends, co-workers)
-- communication at work
Chapter 39Chapter 39 Slide Slide 3636
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Federal Fair Debt Collection Practices Act
no protection for individual creditors who try to collect money
in-house debt collection efforts employees of creditor
sue for serious abuses defamation assault invasion of privacy intentional infliction of mental suffering
Chapter 39Chapter 39 Slide Slide 3737
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Fair Credit Billing Act
mail bills at least 14 days before due consumer has 60 days to report errors respond to inquiries within 30 days settle complaints within 90 days
FTC Regional Office – report complaintsNational creditors – Washington DC
Chapter 39Chapter 39 Slide Slide 3838
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Fair Credit Billing Act
creditors may not send repeated, insistent letters demanding payment until disputes are settled
Purchases more than $50 (products are
defective) that were made in-state or within 100 miles of home – payment may be withheld
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Allows discounts to customers who pay cash --
Chapter 39Chapter 39 Slide Slide 4040
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Credit Ratings
http://www.cbsnews.com/video/watch/?id=3993035n
Chapter 39Chapter 39 Slide Slide 4141
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Federal Fair Credit Report Act
Credit rating service companies
Chapter 39Chapter 39 Slide Slide 4242
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Chapter 39Chapter 39 Slide Slide 4343
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Credit rating
Assessment of one’s ability to pay debts
Chapter 39Chapter 39 Slide Slide 4444
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Chapter 39Chapter 39 Slide Slide 4545
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Chapter 39Chapter 39 Slide Slide 4646
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Denied Credit
Normally – one free credit report per year
Freecreditreport.com
Chapter 39Chapter 39 Slide Slide 4747
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Credit Repair Organizations Act
Consumer must sign Consumer Credit File Rights Under State and Federal Law
Make false claims about its services charge you until they complete the promised services perform any services until you have signed a written contract
and completed a 3-day waiting periodMust specify:
payment terms + total costs detailed description of services they will perform time they will achieve the results guarantees they offer repair company’s name and business address
Chapter 39Chapter 39 Slide Slide 4848
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Credit Repair
Suze Orman Credit Repair Scam
Chapter 39Chapter 39 Slide Slide 4949
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Notice of Debt Payment
Debtor can require the creditor to record the fact that the debt has been paid in public records (when satisfied)
Always get proof of payments – record payments properly
Chapter 39Chapter 39 Slide Slide 5050
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Last Resort
Bankruptcy
Chapter 39Chapter 39 Slide Slide 5151
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CREDIT CARDS
A credit card identifies the holder as a person entitled to obtain goods or services on credit.
A credit card is usually issued in response to a consumer’s written application.
The consumer who signs the card is bound in a contractual relation with the issuer and is liable for all purchases made with the card.
Chapter 39Chapter 39 Slide Slide 5252
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Store credit cards
Chapter 39Chapter 39 Slide Slide 5353
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Major credit cards
Chapter 39Chapter 39 Slide Slide 5454
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Credit card responsibilities
If lost or stolen $50 (charged before reporting)
Cardholder asked for & received cardSigned itUsed it
Issuer had informed liability for unauthorized use liability
Issuer provided description of how to report Issuer provided positive means for ID on card Unauthorized use happened before cardholder reported it stolen/lost
Chapter 39Chapter 39 Slide Slide 5555
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Credit card responsibilities
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Chapter 39Chapter 39 Slide Slide 5656
Bankruptcy
Explain the purpose and importance of the bankruptcy procedure
Identify the various types of bankruptcyDiscuss the limitations of bankruptcy in
discharging debts
LESSON 39-3
GOALS
Chapter 39Chapter 39 Slide Slide 5757
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Article I, Section 8US Constitutional Congress given
power to establish:Uniform laws on the subject of bankruptcy
throughout the United States
Chapter 39Chapter 39 Slide Slide 5858
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What does bankruptcy do?
Creditors – provides fair treatment in their competition for the debtor’s assets
Debtors – opportunity for a new economic start; free from most creditors’ claims
Chapter 39Chapter 39 Slide Slide 5959
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Bankruptcy Rates
Chapter 39Chapter 39 Slide Slide 6060
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Down PaymentDown PaymentMontana and Carolina could not wait to
graduate from high school and get married. They were shocked to learn how much the
other person owed.Montana had:
A new truckBorrowed money on his credit card for the down
payment, tag, and titleBooked their honeymoon to Mexico on his credit
card for $5,000.
60© 2008. Oklahoma State Department of Education. All rights reserved.
Chapter 39Chapter 39 Slide Slide 6161
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Down PaymentDown PaymentCarolina:• Drove an old car that constantly cost her money on
repairs • Charged those repairs on her credit card, along with
her clothes, shoes, dinners with friends, and everything else she wanted or needed
• Her charges totaled $8,000.
Is this a good start to a marriage? What do
you recommend Montana and Carolina do
to get control over their debt?61
© 2008. Oklahoma State Department of Education. All rights reserved.
Chapter 39Chapter 39 Slide Slide 6262
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Managing DebtManaging DebtRefinancing debt• Debt consolidation loan
• Combines all payments into one
• Tends to have high interest rate
• Must change your behavior or you will only have more debt!
62© 2008. Oklahoma State Department of Education. All rights reserved.
Chapter 39Chapter 39 Slide Slide 6363
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Home Equity LoanHome Equity Loan
Borrow money on your home to pay your monthly bills.
If you miss one or more payments, you can lose your home.
63© 2008. Oklahoma State Department of Education. All rights reserved.
Chapter 39Chapter 39 Slide Slide 6464
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Credit CounselingCredit Counseling
Restructure your debt
Set up a new payment plan
Monitor your progress
Some are not reputable
64© 2008. Oklahoma State Department of Education. All rights reserved.
Chapter 39Chapter 39 Slide Slide 6565
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BankruptcyBankruptcy
A legal process where you request help from the courts to help manage your debt.
Bankruptcy petitionChapter 7 – Straight bankruptcy
Chapter 13 – Reorganization of debt
Financial counseling required
65© 2008. Oklahoma State Department of Education. All rights reserved.
Chapter 39Chapter 39 Slide Slide 6666
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BankruptcyBankruptcyChapter 7• Bankruptcy trustee takes
your assets, converts them to cash, and uses the money to pay your creditors.
66© 2008. Oklahoma State Department of Education. All rights reserved.
• Exempt and Non-exempt property• Most people who file only have exempt property.
• Cannot re-file for 8 years• No exceptions
Chapter 39Chapter 39 Slide Slide 6767
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BankruptcyBankruptcyChapter 13• Debt adjustment• Allows you to keep your property. • Repayment plan -
• You must have a job where you can make regular monthly payments to file.
• Lasts about three to five years.
67© 2008. Oklahoma State Department of Education. All rights reserved.
Chapter 39Chapter 39 Slide Slide 6868
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Top Reasons for BankruptcyTop Reasons for Bankruptcy
Divorce
Illness
Gambling
Unemployment
Failing to pay taxes
Excessive medical bills
68© 2008. Oklahoma State Department of Education. All rights reserved.
Why would these contribute to bankruptcy?Why would these contribute to bankruptcy?
Chapter 39Chapter 39 Slide Slide 6969
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When to File?When to File? When you have no other choice:• Financial or credit counseling?• Call creditors?• New payment plans?
It is a drastic action, so be sure!Contact an attorney for pre-screening.
69© 2008. Oklahoma State Department of Education. All rights reserved.
Chapter 39Chapter 39 Slide Slide 7070
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Costs and Benefits of Costs and Benefits of BankruptcyBankruptcy
What are some of the “costs” of filing bankruptcy?
What are some of the “benefits” of filing bankruptcy?
70© 2008. Oklahoma State Department of Education. All rights reserved.
Chapter 39Chapter 39 Slide Slide 7171
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What Have You Learned?What Have You Learned?
Rights
Responsibilities
Costs
Benefits
71© 2008. Oklahoma State Department of Education. All rights reserved.
Chapter 39Chapter 39 Slide Slide 7272
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Life After Bankruptcy?Life After Bankruptcy?
Remains on credit history for ten yearsLower credit scoreHigher interest ratesHigh riskNot all debt eliminatedFees• Attorneys• Counseling• Others
72© 2008. Oklahoma State Department of Education. All rights reserved.
Chapter 39Chapter 39 Slide Slide 7373
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Life After Bankruptcy? Life After Bankruptcy?
No more debt collectors calling
Reduces stress
Fresh start
Lessons learned
73© 2008. Oklahoma State Department of Education. All rights reserved.
Chapter 39Chapter 39 Slide Slide 7474
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Repairing CreditRepairing Credit
Pay bills on time.
Establish budget.
Avoid credit repair services!Continue these good habits, and your score will increase!
74© 2008. Oklahoma State Department of Education. All rights reserved.
Chapter 39Chapter 39 Slide Slide 7575
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EarningsEarnings
Good money management skills reduces the potential of filing bankruptcy or having excessive debt.
High levels of debt is stressful.
High levels of debt lead to personal and family problems.
Know your options to make the best choices when dealing with debt.
75© 2008. Oklahoma State Department of Education. All rights reserved.
Chapter 39Chapter 39 Slide Slide 7676
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Balance SheetBalance Sheet
What are the options to bankruptcy?
Who files bankruptcy?
Why do people file bankruptcy?
What are the costs and benefits of bankruptcy?
How can you avoid bankruptcy?
76© 2008. Oklahoma State Department of Education. All rights reserved.
Chapter 39Chapter 39 Slide Slide 7777
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Paid in FullPaid in Full So, what do you think Montana and Carolina should do?
If you said they need financial counseling, then you are correct.
Managing debt is very stressful and is frequently a source of marital problems, suicide, and health-related issues.
77© 2008. Oklahoma State Department of Education. All rights reserved.
Chapter 39Chapter 39 Slide Slide 7878
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Paid in FullPaid in Full Young people are among the fastest growing segment of the population filing bankruptcy because of high debt levels.
With counseling and changes in behavior, this young couple might be able to avoid becoming a statistic.
78© 2008. Oklahoma State Department of Education. All rights reserved.
Chapter 39Chapter 39 Slide Slide 7979
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You Be the JudgeYou Be the Judge You have successfully filed bankruptcy and
your debts have been forgiven. Does that ensure that you will have a successful financial future?
© 2008. Oklahoma State Department of Education. All rights reserved. 79
Chapter 39Chapter 39 Slide Slide 8080
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WHAT IS BANKRUPTCY?
Chapter 7 liquidation, or “straight bankruptcy”
Chapter 11 reorganizationChapter 13 extended time payment
planChapter 12 plan
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Chapter 7 – Straight Bankruptcy
Non-exempt assets can be sold with proceeds going to pay off creditors
Will eliminate most of debt
Chapter 39Chapter 39 Slide Slide 8282
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PROCEDURE FOR CHAPTER 7 BANKRUPTCY
Voluntary bankruptcyInvoluntary bankruptcyExempt propertyLiquidation and distribution of proceeds
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Which Property Is Exempt from Chapter 7 Liquidation?
Chapter 7 bankruptcy exemptions vary from state to state but may include your:
home home’s equity (a portion of it) Car (one car) land you own equipment and items needed for work insurance and pension payouts public benefits (like unemployment payments or workers
compensation) jewelry, up to a certain value; and various personal property (like furniture, appliances and
clothing).
Chapter 39Chapter 39 Slide Slide 8484
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Property That Can Be Subject to Chapter 7 Liquidation
additional homesvacation homesa second vehiclefamily heirloomsvaluable collector itemsmultiple televisionscash, bank accounts, stocks, bonds
and other investments.
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Chapter 7 Bankruptcy
Chapter 7 Bankruptcy
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Chapter 11 - Reorganization
Committee files a plan for reorganization for a business organization
Committee will assess if plan is:ReasonableCreated in good faith
Must be in the best interests of the creditors
A class of creditors must vote to accept the plan
“Cramdown provision” – judge approves
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Chapter 12 – Debt Relief for family farms (1986)
Files a petition for relief from creditorsDebtor cannot have:
debts totalling more than $1,500,000 income of at least 50 % from farm sources 80% of all debts related to the farm
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Chapter 13 Bankruptcy
Must have regular incomeAvoids liquidation of assetsUnsecured debts of less than $269,250Secured debts of less than $871,550Upon completion of payments – court
grants discharge of debts1976 – Educational Amendments (no
relief unless you can prove hardship)
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Bankruptcy Petition - Voluntary
Filing a petition – beginning of voluntary bankruptcy
Person does not have to be insolvent (unable to pay debts when they are due) to file the petition.
Husbands and wives may file jointly
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Bankruptcy Petition - Involuntary
Person / business owing at least $11,625 to their petitioning unsecured creditors and unable to pay debts when due may be FORCED into involuntary bankruptcy.
12+ creditors – 3 must sign petition
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Petition
list of creditors and amouts owed list of all property owned (including
exempt property)statement explaining the debtors
financial affairslist of current income and expensesConcealing or transferring assets =
crime
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Trustee
Bankruptcy trustee appointed Place secured creditors ahead of
unsecured creditors
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Non-dischargeable Debts
certain taxesAlimony and child supportClaims against the debtor for property
obtained by fraud, embezzlement, or larceny
Claims against debtor for willful and malicious injury
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Non-dischargeable Debts
student loans (gov’t. or nonprofit school)Unless loan became due more than 7 years
before the bankruptcyUndue hardship
Debts due to DWIClaims not listed by the debtor
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Liquidation and Distribution
Trustee distributes proceeds to prioritized list of creditors.
Secured creditors first / Unsecured second!