Do Credit Problems Lead To Bankruptcy? Essay, Research Paper

Do Credit Problems Lead to Bankruptcy?

The reasons we as Americans buy on credit varies, but without it most of us would probably never be able to purchase necessities such as a home or automobile. The nation’s economy depends on credit; the promise to pay later for goods and services used today. But along with consumer credit comes consumer debt.

With the rise in telemarketing and commercializing in America it is no wonder why Americans feel the impulse to buy now, pay later. The most common form of consumer debt is installment debt, which is when a consumer borrows the money to purchase an item and agrees to repay the loan in equal installments over a fixed period of time. Without installment debt most consumers could not afford to purchase items such as a home. The truth of the matter is that we, as Americans, tend to want to purchase more than we can afford to purchase when we want it. But, we can afford to pay it out, over time, in fixed payments.

Mortgages, a debt owed on real property, are the latest form of installment debt. Other forms include automobile loans and credit card purchases. Just pick up the newspaper any time after Christmas and you will find articles on managing your mounting debt from Christmas. Not realizing the extent of the consumers’ debt is one of the most common types of credit problems. Denial may play a partial role in this problem, but the lack of education seems to be the largest reason for consumer debt.

Credit card use is up 20% and a large number of Americans do not know the percentage rate at which the credit card companies charge. Many credit card companies have started “personalizing” interest rates by not disclosing the interest rate until after the consumer has received the card. By not disclosing the interest rate on the application the credit card companies prohibit the consumer from shopping around for the best deal. You could just say they should cancel the credit card, but did you know several requests for consumer credit could be viewed negatively because the information is reported to the credit bureaus? This leaves you, the consumer, with a bad credit report.

Household debt and bankruptcy are at record levels and appear to be on the rise. So what is bankruptcy all about? For most, bankruptcy is nothing more than a fresh financial start. It is designed to help those who are in debt beyond a reasonable means to repay. The law states that a person is entitled to start over financially so long as they have not been dishonest in getting into debt. Bankruptcy will wipe out all of your unsecured debts and let you keep most, if not all, of your property.

Bankruptcy is written right into the Constitution (Article I, Section 8, Paragraph 4) and therefore, United States Bankruptcy Law has been around for more then 200+ years. Virtually every industrialized country in the world has the option of filing bankruptcy as a method of financial relief. Bankruptcy is the necessary safety valve in the free market system. Without bankruptcy, people that are over their head financially would give up or become part of the underground. While it is not easy to make the decision to file bankruptcy, over one million Americans survive it every year.

There are four main types of bankruptcy: Chapter 7, 11, 12, and 13. Chapter 7 (Liquidation) is the most common. It is designed for debtors in financial difficulty who do not have the ability to pay their existing debts. Under Chapter 7, you may claim certain property exempt and a trustee may take possession of the remaining assets in order to liquidate them and pay your creditors according to priorities set forth in the Bankruptcy Code. Chapter 13 (Repayment of Debt) is designed for individuals who are temporarily unable to pay their debts, but would like to pay them in installments over a period of time. Chapter 11 (Reorganization) is designed primarily for the reorganization of a business. Its provisions are very complex and should be done only after consulting an attorney. Chapter 12 (Family Farm) is designed to permit family farms to repay their debts over a period of time.

Until we as consumers begin to educate ourselves and stop living beyond our means, we only have ourselves to blame. In conclusion, although consumers are not forced to buy, most feel compelled to purchase goods and services because they need them and do not want to wait. Rather than saving they go into debt, the most common of which is installment debt.

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“Major Growing Pains” U.S. News and World Report (Oct. 21, 1996) Pg. 62-643.

Lee, Susan. Susan Lee’s ABZ’s of Economics New York; Poseidon Press, 1997

“What’s the Rate? They Won’t Say.” U.S. News and World Report (Aug. 19, 1996) pg.614.