Unit 5 lesson 1 Creditworthiness & Bankruptcy

UNIT 5 – RISK MANAGEMENT

LESSON 1 – Creditworthiness &

Bankruptcy

Creditworthines

Creditworthiness is a valuation by lenders that determines the possibility a borrower may default on his debt obligations.

It considers many factors such as repayment history, assets, and liabilities.

Creditworthiness is often depicted as a credit score
between 300 & 850. A credit score above 670 is generally
considered to be “good,” while any score below 580 is
considered “poor.”

Multiple Choice

What is Creditworthiness?

• Creditworthiness is the calculation of a borrower's favorite color.
• Creditworthiness is the assessment of a borrower's shoe size.
• Creditworthiness is the evaluation of a borrower's ability to repay a loan.
• Creditworthiness is the evaluation of a borrower's spending habits.

The Five “C’s” of Creditworthiness

1) Character refers to a borrower’s history of paying
obligations.
2) Capacity refers to one’s ability to repay & is usually
measured by current income & level of outstanding debt.
3) Capital refers to savings & other assets one can use to repay.
4) Conditions refer to other circumstances that may impact the ability to obtain credit (e.g., economic conditions).
5) Collateral refers to assets the borrower has that could be taken by the lender if the borrower fails to repay.

Multiple Select

Select all that are considered part the 5 “C’s” of creditworthiness ?

• Character refers to a borrower’s history of paying
  obligations

• Capital refers to savings and other assets one can use to repay.

• Checking account available to pay bills

• Collateral refers to assets the borrower has that could be taken by the lender if the borrower fails to repay.

The Federal Government regulates credit and loan practices with several laws.

• The Fair Debt Collection Practices Act prevents abusive & deceptive practices by debt collectors

• The Credit Card Accountability, Responsibility, & Disclosure (CARD) Act

o bans unfair rate increases & unfair Fees

o requires that credit card contract terms be presented
to consumers in clear language

o ensures accountability from credit card issuers and regulators

Multiple Choice

What are the purposes of the Fair Debt Collection Practices Act and the Credit Card Accountability, Responsibility, & Disclosure (CARD) Act

• The Fair Debt Collection Practices Act protects consumers from abusive debt collection practices, and the Credit Card Accountability, Responsibility, & Disclosure (CARD) Act promotes fair practices in the credit card industry.
• The Fair Debt Collection Practices Act and the Credit Card Accountability, Responsibility, & Disclosure (CARD) Act are unrelated to consumer protection
• The Credit Card Accountability, Responsibility, & Disclosure (CARD) Act encourages unfair practices in the credit card industry
• The Fair Debt Collection Practices Act promotes aggressive debt collection practices

The Federal Government regulates credit & loan practices with several laws.

The Equal Credit Opportunity Act prohibits creditors from discriminating against a credit applicant on the basis of
• race
• Color
• religion
• national origin
• sex
• marital status
• Age
• Because the applicant receives public assistance

Some strategies for effective debt management include

Signs that a consumer is getting into credit trouble include

• maintaining accurate financial records
• making payments on time to prevent penalties

& other debt problems (e.g., liens, foreclosures, garnishment, repossessions, evictions)

• using early payoffs, if advantageous

• ensuring against identity theft

• inability to pay bills
• making only the minimum

payment

• using one credit card to pay

other credit card balances

• receiving collection agency

calls

Multiple Select

Which are signs that a consumer is getting into credit trouble?

• inability to pay bills

• maintaining accurate financial records

• making only the minimum payment

• making payments on time to prevent penalties & other debt problems

When consumers take on too much debt, there are sources of assistance.

When considering sources of assistance for debt management, individuals should:
•distinguish between discrimination & legitimate credit denial

•ensure the right to appeal a credit denial

•apply knowledge of laws’ protection to consumers who have credit problems

•review the ramifications of bankruptcy

•check telephone directories & internet sites for credit
counseling services & commercial debt-adjustment firms
that can help clients address credit problems, manage debt,
and rebuild credit

•evaluate sources for reliability & effectiveness.

Multiple Choice

What can a consumer do if he or she takes on to much debt?

• Avoid opening any communication with creditors
• Ignore the debt and hope it goes away
• Take steps such as creating a budget, negotiating with creditors, seeking help from a credit counseling agency, or considering debt consolidation or bankruptcy as a last resort.
• Take out more loans to pay off existing debt

What is a credit core?

•Credit reporting agencies have established formulas to produce credit scores for each borrower.

•Credit ratings are based on information in a person’s credit record, including income, payment history, employment record, and other personal factors.

•Making payments (e.g., bills, rent) on time helps an individual
establish and maintain good credit.

•Individuals should access their own credit reports before
applying for credit or when denied credit.

What is a credit score?

•Good credit scores may enhance one’s ability to borrow & the interest rate charged. Credit scores may also help decrease one’s insurance rates & improve employment options.

•Poor credit can adversely affect one’s ability to get a job, rent an apartment, obtain a car loan, obtain security clearance — and may even bring an increase in car insurance.

•To correct errors in one’s credit report, an individual should tell the consumer reporting company, in writing & with supporting documents, what information is inaccurate. The
consumer reporting company then must investigate the issue and correct the error.

Bankruptcy

•There are many causes of bankruptcy, but also many
consequences borrowers should be aware of.

•The 2 most common types of bankruptcy for individuals are
chapter 7 bankruptcy and chapter 13 bankruptcy.

•Chapter 7 is the chapter of the U.S. Bankruptcy Code providing
for “liquidation.” Liquidation is the sale of a debtor’s assets and
the distribution of the proceeds to creditors.

•Chapter 13 is the chapter of the U.S. Bankruptcy Code
providing for adjustment of debts of an individual with regular
income. Chapter 13 allows a debtor to keep property & pay
debts over time, usually 3 to 5 years.

Multiple Choice

What is the difference between chapter 7 and chapter 13 bankruptcy?

• Chapter 7 involves a repayment plan, Chapter 13 involves liquidating assets.
• Chapter 7 involves a repayment plan, Chapter 13 involves selling assets.
• Chapter 7 involves restructuring debt, Chapter 13 involves discharging debt.
• Chapter 7 involves liquidating assets, Chapter 13 involves a repayment plan.

Bankruptcy

•In most cases, an individual files for bankruptcy voluntarily. However, creditors can force debtors into involuntary bankruptcy.

•The most common causes of bankruptcy are

o illness or injury

o failure to plan & budget

o small business failure

o job loss

o impulse, emotional spending

o economic downturn

•Bankruptcy generally affects one’s ability to obtain credit for a period of time & may affect employment.

•An attorney should be consulted for legal advice on when &
how to file for bankruptcy.