Principles of Business and Personal Finance s1

Principles of Business and Personal Finance NC Competency 008: Explain the concept of credit and its effect on the Individual and the total economy. NC Objective 8.05: Examine bankruptcy and credit laws. I. Your Credit A. Credit Bureau: agency gathering data for banks, savings institutions, and other credit grantors on consumers’ experience (their credit history) meeting obligations, based on information reported by credit grantors. This information is distributed for a fee to other credit grantors, who use it in deciding whether to approve or decline credit applications and how much credit to offer any particular borrower. B. Building Credit: is showing financial institutions you are credit worthy to extend credit to. Methods to build your credit include: 1. Open a checking or savings account 2. Apply for a local department store credit card. 3. Take out a small loan from your bank. 4. Pay all loans and credit card bills on time. C. Handling your credit problems Handling Credit Problems 1. Credit Counselor: credit advisory service offered to persons with excessive debts as an alternative to bankruptcy. Debt counselors affiliated with the National Foundation for Consumer Credit charge only a nominal monthly fee for helping consumers work their way out of debt. Consumers are budgeted a portion of take-home income to pay off current obligations and voluntarily curb their use of credit until debts are repaid. 2. Consolidation Loan: installment loan that enables a borrower to combine several outstanding loans under one loan, rather than several smaller ones, often with a lower monthly payment. 3. Credit Services: Consumer Credit Counseling Service, which is a nonprofit organization that provides debt counseling services for families and individuals with serious financial problems. These services include: a. Debt Repayment Plan b. Reorganizes debt and sometimes includes renegotiating terms of debt. c. Creditors often accept arrangements for partial payment, rather than not being repaid due to bankruptcy. II. Your Rights A. What if you are denied credit? The Equal Credit Opportunity Act says: 1. You have the right to know the reasons. 2. You are entitled to know what specific information in the credit report led to your denial. 3. No fee will be charged if you state why you are requesting a copy of the report. 4. You are entitled to ask the credit bureau to investigate any inaccurate or incomplete information and correct your records. B. Truth-In-Lending Laws: act passed by Congress in 1969 requiring lenders to disclose key terms in extension of credit. The act also requires: 1. That you be told the cost of a credit purchase in writing before you sign a credit agreement. 2. Protects consumers against unauthorized use of credit cards. 3. Limits your liability to $50 for unauthorized credit card purchases made prior to notification of the issuer. C. Usury Laws: charging loan interest higher than the rates allowed by law. Interest rates in consumer credit contracts are controlled by state law, and the highest permitted rate is called the usury rate or the usury ceiling. When you think of usury think of “loan sharking”. D. Consumer Credit Protection Act (CCPA): of 1968 launched Truth in Lending disclosures requiring creditors to state the cost of borrowing in a common language so the consumer can calculate the actual charges, compare costs, and shop for the best credit offer. Since then, credit protections have multiplied rapidly.

The concepts of "fair" and "equal" credit have been written into the Consumer Credit Protection Act. That law bars unfair discrimination in credit transactions, requires that consumers be told the reason when credit is denied, lets borrowers find out about their credit records, and sets up a way for consumers to settle billing disputes.

The Consumer Credit Protection Act was meant to reduce the problems and confusion about consumer credit, which as it became more widely used in our economy, also grew more complex. Together, these laws set a standard for how individuals are to be treated in their financial dealings. E. Equal Credit Opportunity Act (ECOA): federal law enacted in 1974 requiring lenders to give businesses and consumers equal access to credit. The act specifically prohibits credit discrimination on the basis of race, marital status, national origin, age, or dependence on public assistance. Borrowers who exercise their consumer rights under the CCPA area also protected from credit discrimination. Lenders are required to respond to credit application within 30 days, and if the application is rejected, to offer reasons for denying credit. F. Fair Credit Billing Act (FCBA): federal act specifying procedures for resolution of billing disputes in consumer installment credit and credit cards. Enacted by Congress in 1974, the FCBA amends the Truth in Lending Act by: (1) requiring lenders to correct billing errors within 90 days of receiving a consumer complaint; (2) prohibiting credit card issuers from offsetting an unpaid bill against a deposit account without obtaining a court order; and (3) limiting the cardholder’s liability to a maximum of $50. Consumers must be given a statement of their credit rights. G. Fair Credit Reporting Act (FCRA): federal law enacted in 1970 to ensure confidentiality of consumer credit information held by lenders and credit reporting agencies. The act prohibits disclosure of credit files, other than for specific purposes, such as employment, insurance and bona fide credit applications; requires credit bureaus to give consumers a copy of their credit report when requested; and specifies procedures whereby consumers can dispute any derogatory information in a credit report. H. Fair Debt Collection Practices Act (FDCPA): it is illegal for debt collectors to threaten consumers with violence, use obscene language, or contact consumers by telephone at inconvenient times of places. Debt collectors are not allowed to impersonate government officials or attorneys, obtain information under false pretenses, or collect more than is legally owed. I. Federal Trade Commission (FTC): federal agency established in 1914 to foster free and fair business competition and prevent monopolies and activities in restraint of trade. It administers both antitrust and consumer protection legislation. III. Bankruptcy A. Bankruptcy: state of insolvency of an individual or an organization, in other words, an inability to pay debts. There are two kinds of legal bankruptcy under U.S. law: involuntary, when one or more creditors petition to have a debtor judged insolvent by a court; and voluntary, when the debtor brings the petition. In both cases, the objective is an orderly and equitable settlement of obligations. B. Bankruptcy Act of 1978: removed some of the rigidities of the old law and permitted more flexibility in procedures. The Bankruptcy Reform Act of 1984 curtailed some of the more liberal provisions (mainly affecting consumer bankruptcy) of the 1978 act. 1. Chapter 7: of the 1978 act, dealing with liquidation, provides for a court- appointed interim trustee with broad powers and discretion to make management changes, arrange unsecured financing, and generally operate the debtor business in such a way as to prevent loss. Only by filing an appropriate bond is the debtor able to regain possession from the trustee. Key points of chapter 7: a. Draw up a petition listing assets and liabilities. b. Most of the debtor’s assets are sold to pay off creditors. c. Cannot release debt on alimony, child support, taxes, fines, educational loans, and court fees. 2. Chapter 11: deals with reorganization of businesses, provides that, unless the court rules otherwise, the debtor remains in possession of the business and in control of its operation. Debtor and creditors are allowed considerable flexibility in working together. 3. Chapter 13: deals with debt adjustment or reorganization for individuals, allows people to put forward a plan to repay creditors over time, usually from future income. Most consumers’ reorganizations take place under Chapter 13 of the bankruptcy law. A Chapter 13 bankruptcy normally requires monthly payments to the bankruptcy trustee for a period of three to five years. Once payments have been completed under the plan, the debtors are entitled to a discharge. Chapter 13 reorganizations also allow debtors to keep more property than in Chapter 7 liquidation. C. Effects of Bankruptcy 1. Kept on file with credit bureau for 7-10 years. 2. Affects credit rating, future extensions of credit, loss of jobs, etc. 3. Complete federal laws and rules for bankruptcy can be found at this website: http://www.uscourts.gov/library/bankbasic.pdf 4. Filing puts the world on notice about your personal financial affairs. 5. Since it is a civil court proceeding, it becomes a matter of public record. *In some cases, (chapter 13) even your employer can be involved because this chapter requires deductions from you paycheck. 6. Bankruptcy also stays on your credit report for up to 10 years and can hinder your ability to get a job, establish new credit, get insurance and even a place to live. 7. You will also have to pay court, attorney and filing fees up front. Furthermore, you will lose control over your finances since a Trustee will be appointed to oversee the completion of your filing. 8. Filing doesn't necessarily get you out of all your obligations, such as education loans, back taxes, alimony, etc.