Borrowers affect their creditors’ position not only through their investments but by changes they make in the indebtedness itself, whether increases or decreases. Because borrowing increases risk, borrowers’ attitudes toward additional borrowing are similar to their attitudes toward risks in investments. Once they are in debt, borrowers may want to increase their debt even more and to resist decreasing their indebtedness.
Unsecured cards are the most popular credit cards. They don’t require you to have any collateral. Credit is issued based upon your credit worthiness. Lenders will look at factors such as your credit score and income in determining how much credit to grant. If you decide to get an unsecured card, start with a low credit limit like $500. Again, try to pay off charges in full each month to avoid interest charges.
If you’re unable to pay off the balance each month, make a plan to clear it within a certain time frame.
Chapter 7 Bankruptcy
Credit cardsare a form of revolving credit, which means there are no fixed payments or loan periods. If you have no balance, you owe nothing. But if you have a lot of charges, you could pay for several years before eliminating your debt.
Credit cardcompanies use compounding interest. That means unless you pay your balance in full, interest charges are added each month to what you owe, and interest is calculated on that new balance. In other words, you are paying interest on interest.
Let’s say you have a card with 30% interest, and this interest is compounded daily. This means that for each day it carries a balance, you will be charged 0.08% per day. Sounds like no big deal, right? But as new charges are added, the credit card company will compound more interest on top of that. Before long, you could end up with a huge bill. Consider a $1,000 credit card balance with a 30% interest rate. If you make just a minimum payment of $30 per month, it will take 6 years to pay off your debt.
One way to keep interest from building is to avoid the trap of the monthly minimum. Paying that amount — just 2% to 4% of your total balance — can make you feel like you owe less than you really do.
Chapter 13 Bankruptcy
Remember, credit cards shouldn’t be used to extend your income. If you keep coming up short on money to pay for your charges, stop using that card until you get your finances under control. If you use credit cards for luxuries, such as vacations or holiday gifts, be sure to have a plan for paying off the balance quickly.
When you pay more than the monthly minimum, you are paying down the principal balance of the loan and freeing yourself from the cycle of debt. The lower the principal balance, the less interest the credit card company charges. Here’s another way to look at it: The quicker you pay off your balance, the more you save, the more you win.
When you receive a credit card in the mail, you’ll receive a document that spells out the terms, as well. That’s the disclosure statement. Hold on to it. It goes over the benefits and penalties of your credit card. Remember to read the fine print. There you’ll find information about how much your interest rate may increase if you pay your bill late.
Chapter 11 Bankruptcy
Not everyone earns before buying. Most of what we purchase we finance through borrowing. The earning comes later. Nearly all Americans borrow to buy their homes, and most automobiles are bought on time. Add to this the credit card balances, finance company loans, department store debts, and debts to individuals, and you begin to get an idea of the pervasiveness of household debt. We “sign and travel” for vacations, charge the wife’s birthday present, and put the health club membership on plastic. About one-third of the nation’s population describe themselves as either heavily or moderately in financial debt, one-third report being slightly in debt, and only one-third report no financial (that is, excluding home mortgage) debts at all. As I write these words, the fraction of Americans’ disposable income that goes toward debt servicing continues to rise; it has now reached 18 percent. The total amount of debt held by the average household has increased relentlessly for decades, and it now equals just about what that household makes in any given year.
TILA covers all consumer credit (not commercial or agricultural credit) in amounts of $50,000 or less plus other credit transactions of any size involving consumers if secured by real property (mortgage credit). Besides mandating specific disclosures, the act and its implementing regulation, Federal Reserve Board (FRB) Regulation Z, 12 CFR Part 226, specify precise definitions and calculation methods to assure uniformity. The act also contains some nondisclosure regulations of creditor behavior, often referred to as behavioral or substantive regulations, but disclosures have always been its main purpose. The key substantive provision in the original act involved the right of rescission on non purchase-money credit to consumers secured by the consumers’ principal dwelling. This provision allows borrowers on a second lien and all who refinance a mortgage loan to rescind or cancel the loan within a three-day period after receiving all the disclosures.
Chapter 12 Bankruptcy
Since 1968, amendments to TILA have added additional substantive requirements, particularly in the areas of credit card solicitations, credit card billing, credit card repricing, and credit secured by dwellings. Open-end credit, such as typical credit card credit and check overdraft credit that permits multiple credit advances and variable payments, has its own set of disclosure requirements, found in subgroup 1C, “Open End Consumer Credit, Including Credit Card Accounts.” Section 1D, “Open-End Consumer Credit Secured by Consumer’s Dwelling,” in turn, contains the requirements for open-end mortgage credit. The open end credit lists are also lengthy, requiring disclosures of individual transactions under the open-end plan, outstanding balances, finance charges, fees, APRs, and error-resolution policies.
An amendment in 1988 substantially expanded disclosure requirements for credit card applications and solicitations, extending requirements to solicitations as well as at account opening and with periodic billing statements. Any changes in terms generate further special disclosure requirements. Newly enacted Amendments to Regulation AA (“Unfair or Deceptive Acts or Practices”) and Regulation Z in December 2008 cover many practices in the credit card area and substantially rearrange many of the required disclosures.
It makes a difference, of course, whether the debt is $50,000 or $50 million and how large it is relative to the total assets and debts of the borrower and the lender. A debt of $50,000 is typically the borrower’s problem, whereas a $50 million debt is likely to become the lender’s problem.3 If the borrower is in default on a $50 million debt, the lender may tread carefully so as to avoid destroying the borrower’s business, into which the $50 million had been invested.
If the lender treads too carefully, however, he or she may find it difficult to be paid back.
Chapter 9 Bankruptcy
When lenders do go to court, the consequences depend on the law, which differs across countries and periods. In ancient Rome, the property of a defaulting borrower was taken, and the borrower and his family could be sold into slavery. Shakespeare’s merchant of Venice had a claim to a pound of the borrower’s flesh. In the Middle Ages, defaulting borrowers could be placed in debtors’ prison until their families paid the debt. Putting defaulting debtors into prison was common in many countries until well into the nineteenth century. In the United States, the federal government and most states abolished this practice in the 1830s.
Default and bankruptcy are disruptive. Under today’s laws, they are less disruptive than in ancient Rome or in the Middle Ages, but most people still strongly prefer to avoid bankruptcy if possible. For a business, the disruptions caused by default can be fatal. If a creditor seizes a truck or a machine, the business’s activities may come to a halt. When the business has several creditors, the danger is greater because the creditors may have competing claims. Each one may want to seize an asset before the other creditors. In this situation, declaring bankruptcy may be a way to prevent creditors from fighting each other under the law of the jungle and letting the business go down the drain. If you are considering bankruptcy, consult with an experienced Morgan Utah bankruptcy lawyer.
Disruptions from default and bankruptcy affect not just the borrowers and the lenders who are involved. They may also affect the borrowers’ employees, their suppliers, and their customers.
Before creditors take action, the law allows borrowers to declare bankruptcy. In that case, a bankruptcy court or trustee becomes involved. Traditionally, the purpose of bankruptcy was to prevent individual creditors from taking actions that would end up harming not just the borrower but also the other creditors. Sometimes bankruptcy may be your best option. Speak to an experienced Morgan Utah bankruptcy lawyer.
Whereas in the past the focus was on liquidating assets and paying creditors according to the priority of their claims, now the focus is mostly on maintaining the business as a going concern. Bankruptcy is used to renegotiate contracts with employees, suppliers, and the creditors themselves and perhaps also to shed unprofitable parts of the business and give the company a fresh start. The parties involved may be willing to accept reductions of their claims because the alternative of a forced liquidation would be even less attractive.
For some industries, such as airlines, the bankruptcy process works quite smoothly. An airline typically continues its operation or is acquired by another airline, and the process allows renegotiation of labor and other contracts in light of the new circumstances.
For other industries, the process works less well. Negotiations may involve too many parties. Each party may engage in brinkmanship in order to receive a good part of the spoils. Given the problems that brought the firm into bankruptcy, there is a great deal of uncertainty about the firm’s prospects or the value of its assets. The discussions and negotiations can drag on for a long time, particularly when they involve many different creditors and different priorities and interests. During this time the firm may be unable to compete properly in the market and attract or retain customers.13 For example, car buyers might avoid buying cars from a manufacturer in bankruptcy or about to go into bankruptcy, fearing that, if the firm is liquidated, buying spare parts or being able to resell the cars might become difficult. This type of reaction in itself can be a reason that eventually the firm will not be able to continue in business and must be liquidated.
Although they are disruptive, bankruptcies and liquidations should be seen as normal occurrences in a market economy. All are free to run businesses the way they like under the law. Their business strategies may fail, but if they are successful, they can provide a basis for innovations, growth, and new employment. No one knows in advance which entrepreneurs, firms, and strategies will be successful and which ones will fail. This will be determined in the market. Along with the successful firms, therefore, there will always be unsuccessful firms as well. Bankruptcy and liquidation are ways to deal with these firms, repairing some and eliminating others, so as to prevent more resources from being wasted on them.
Only a Liquidity Problem
Borrowers who cannot pay their debts often want creditors and others to think that they have only a temporary problem and will be able to pay their debts later. This will help borrowers to avoid default and bankruptcy and might allow them to continue to borrow or find ways to fund additional investments.
A temporary inability to pay is sometimes called a liquidity problem.
Default and bankruptcy rarely occur due to pure liquidity problems. If it is reasonably easy to verify that a borrower has enough valuable assets to be able to make payments on a new loan, a temporary liquidity problem does not typically lead to default or bankruptcy. Because default and bankruptcy are unpleasant and costly both to the borrower and to creditors, they will try to find some other arrangement.
Morgan Utah Bankruptcy Lawyer Free Consultation
When you need legal help with a bankruptcy case in Morgan Utah, please call Ascent Law LLC (801) 676-5506 for your Free Consultation. We want to help you.
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West Jordan, Utah
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