During the week of September 20, 1998, the US Senate agreed to debate a bill (S 1301), intended to make it more difficult for people of means to use bankruptcy to walk away from debt. Those who could pay at least 20 percent of their unsecured debt would be steered by judges to file for Chapter 13 bankruptcy, which entails some repayment. They no longer would qualify for Chapter 7, which requires little or no repayment. The bill also would provide more collection tools to lenders such as credit card companies, stores and banks. An estimated 1.35 million Americans filed for bankruptcy last year, up 25 percent from 1996 and double the 1986 level, according to participants in the debate. Discussion topics include credit card debt, bankruptcy, loans, interest rates and financial literacy.

KEY CONCEPTS

Consumers, Credit, Incentive

INTRODUCTION

squashed by debtDuring the week of September 20, 1998, the US Senate agreed to debate a bill (S 1301), intended to make it more difficult for people of means to use bankruptcy to walk away from debt. Those who could pay at least 20 percent of their unsecured debt would be steered by judges to file for Chapter 13 bankruptcy, which entails some repayment. They no longer would qualify for Chapter 7, which requires little or no repayment. The bill also would provide more collection tools to lenders such as credit card companies, stores and banks. An estimated 1.35 million Americans filed for bankruptcy last year, up 25 percent from 1996 and double the 1986 level, according to participants in the debate.

MATERIALS

  • Votes in Congress: This 1998 Washington Post article that discusses when The House passed a bill (HR 3892) to transfer most controls over bilingual education from the federal government.
    goo.gl/GW0CAH (pqarchiver.com - URL shortened)
     
  • U.S. Consumer Debt Soars $7 Billion in one Month:  This 1998 Bankrate article discusses why U.S. consumer debt erupted in one month.
    www.bankrate.com/brm/news/cc/19980408.asp
     
  •  Credit Card Basics:  At this Bankrate site, readers can discover the pros and cons of having a credit card.
    www.bankrate.com/brm/green/cc/crdt1a.asp
     
  • Foil the 6 Most Common Consumer Credit Complaints:  This BankRate page answers some of the most frequently asked credit card owner complaints.
    www.bankrate.com/finance/debt/6-consumer-complaints-most-common-survey-1.aspx
     
  • Jump$tart:  Jump$tart is a national coalition of organizations dedicated to improving the financial literacy of pre-kindergarten through college-age youth.
    www.jumpstart.org/

PROCESS

(Excerpted from "VOTES IN CONGRESS " )

Who will be helped and who will be hurt if this bill becomes law? (Helped: creditors and consumers, Hurt: consumers facing bankruptcy)

How would this legislation work as an incentive (or disincentive) to consumers? (On average, it would increase the cost of discharging unsecured debt.)

How might creditor behavior change if this legislation is enacted? (On average, the legislation would decrease risks incurred by creditors. As a result, the amount supplied would increase.)

According to some consumer advocates, creditors have been guilty of aggressively marketing to consumers who have just filed for bankruptcy.

Read the article, "US Consumer Debt Soars $7 Billion in One Month ."

What consumer group seems to be the target of a marketing push for new credit cards? (Subprime borrowers, previously bankrupt)

What do you suppose is behind the increase in the volume of home equity loans coupled with the decline in revolving consumer loans? (Answers vary. People may be choosing to refinance their debt, taking advantage of the tax deduction and low interest rates available with the refinanced home loans. The total debt may be unchanged.)

Many consumers are attempting to manage heavy loads of unsecured credit card debt. It makes sense to carefully evaluate the consequences of choosing to own and use a credit card.

Visit the Bankrate website to read "Understanding the Fundamentals: Credit Card Basics ."

According to the article, what are the pros and cons of having a credit card?

Pros: With a credit card, you can borrow money any time you need. The loan you get often is available without interest for nearly a month. Most credit cards give you at least 25 days to pay off your balance before you're charged interest.

Federal and state laws also provide a certain amount of extra protection when you make a purchase with a credit card. It's possible, if you follow the rules, for a purchase to be deleted from your bill even if the merchant refuses to take it back.

Cons: Sometimes, though, a credit card can make buying your favorite things a little too easy. Accumulate large balances on your card and you could wind up becoming a slave to this instrument. You'll know you're in this situation when you decide you want to buy a car or a house, or travel or move, but suddenly realize that you're maxed out in credit card debt and you need to put aside every available penny to pay bills. You also might pay too much for your credit card. Some card issuers charge high interest rates -- as much as 18 percent to 21 percent. If you carry a balance, you could find yourself carrying a balance for longer than you'd like based on accumulated interest charges!

Plus, the credit card is a favorite target for scam artists. You need to watch what you do with your card and to whom you release your credit card number. You also want to make certain you're obtaining your credit card from a reputable issuer that provides good customer service.

Can you think of more pros and cons? (Answers vary.)

Read Foil the 6 Most Common Consumer Credit Complaints to learn about the credit problems some consumers have experienced.

What's the best strategy for reducing credit card debt? Pay off smaller balances first and then tackle the larger ones?

(Pay off the credit card balance with the highest interest rate first. It carries the highest opportunity cost.)

What is a potential drawback of obtaining a card with a low interest rate?

(The credit card company can make adjustments on the interest rate it charges, as long as the company notifies you.)

Teachers, visit the Jump$tart Coalition to search a database of educational materials on personal financial literacy. More classroom-tested lessons are available from "Wallet Wisdom", Copyright (c), Council for Economic Education.

EDUCATOR REVIEWS