Credit And The Economic System:Blessing Or Curse
In the old days, major economic movers and shakers were much more likely to start their economic activities from a position of being cash-strong. What do I mean by this you might ask? Simply, I mean they maintained a financial position in which they had ample cash on hand to finance their endeavors. Thus, the major economic titans of the past who accumulated vast fortunes did so by using much more hard cash to finance their investments and businesses. Of course, many did use credit to some extent, however, they used it at a much more lower rate than similar businessmen today.
Generally, business of yesterday used much less credit than today. Everyone from the small business owner to the large titans considered credit a supplement source of capital. Credit, although available, was always secondary and it was just a given that you needed hard capital to get started.
Oh, how the world has changed! Today, a common phrase often bantered about is OPM. Most, if not all finance minded individuals know those letters well. OPM simply stands for Other People’s Money. Today, most investment is done using this concept and the more it plays into an investment, the better.
Consumers of today typically use credit to finance most of their activities and leverage the equity they have accumulated in their secured assets. A secured asset is any asset that is secured by something physical like a home or a car. Secured assets can give the average person the credit worthiness to act like the big boys of finance. Usually, the credit consumers do use, is not spent on investments but on consumer purchases like improvements to the home, a new car or other non-emergency purchases like vacations, etc.. Thus, for credit users of all levels, some basic techniques or ways to get credit are universal. Credit utilization, with all its power and influence radiates down the food chain from the highest titan of business to the average consumer.
For the titans of the world of business investments, when they get into trouble financially, they have much more flexibility to avoid ruin than the average individual. Indeed, they have their high-priced attorneys and tax accountants to give them the very best of advice to avoid ruin. Alas, the average individual does not have the resources the rich have at their disposal. Thus, when an average individual gets into credit trouble and cannot make payments, often, it is a calamity.
The average consumer, when faced with the calamity of not being able to support their payments, is faced with a dire situation. Often times, they can’t pay their most important payments like their home or car. How does a consumer get into such a situation? Obviously, they fall into delinquency on their bills due to some sort of cash flow interruption. Job loss, divorce or other unforeseen causes can destroy a previously well-paying consumer’s ability to pay what they owe. Once this happens, often the debt, along with the interest that accumulates snowball on the debtor. Within a few months, the debt snowball gets unmanageable. The consumer is faced with the loss of their most important assets like their home or car. Since the average consumer usually does not have the resources that the wealthy have, their ability to deal with the credit crisis is more limited.
This article then, will discuss the options available to the average consumer faced with a credit crisis. Truly, they have a very limited amount of options at their disposal. Some of the options are obvious and others less so. We will look at some of the main options for the average consumer. Usually, the average consumer can benefit from some but not all of the options. Thus, the consumer should examine each option carefully and pick the overall best option for their unique situation.
1. Bankruptcy: This is the first option that comes to mind for the average consumer. Indeed, depending on the chosen Chapter, which for most is either 7 or 13, the debtor can escape most or all of their consumer credit debts. Filing Bankruptcy Chapter 7 usually is for debtors who do not have Secured Assets like Real Estate or expensive automobiles. Filing Bankruptcy Chapter 13 allows a debtor who has Secured Assets to protect the assets while being afforded the opportunity to catch up with their arrears payments. An initial analysis of Chapter 7 versus Chapter 13 is in order for any prospective Bankruptcy debtor. In addition, the overall Pros and Cons of Bankruptcy should be examined so the debtor knows fully what they are getting into.
Although Bankruptcy is very popular and is right for a great many individual debtors, it is not right for everyone.
There is a dark side to bankruptcy and one must remember that for a time, the consumer will have the stigma of Bankruptcy stamped on their forehead.
Often times, people avoid bankruptcy because of the label it places on them. However, labels and difficulty aside, the benefits of filing Bankruptcy usually outweigh the negatives of filing if looked at on a purely pro and con basis. First and foremost, Bankruptcy gives the debtor a fresh start and the debtor is solicited for credit within the first year. On the negative side, being able to rent after Bankruptcy can sometimes be problematic. Landlords and others who are asked to trust the debtor and extend them credit sometimes cringe at the prospect of dealing with a former Bankruptcy debtor. All debtors, when faced with moving, are faced with the question of: Can I rent after Bankruptcy?
Are Bankruptcies public is another question facing the prospective Bankruptcy debtor. Most individual debtors want to keep their financial situation private. Debtors are generally dismayed at the thought that anyone will be able to find out via their credit report.
Buying a car after Chapter 7 Bankruptcy can be an issue that faces the post Bankruptcy debtor. Often, gaining a car loan can be problematic.
The above, are but a few of the issues one must consider when weighing the pros and cons of Bankruptcy. However, what must be remembered is that the individual debtor will be afforded a Fresh Start and that fresh start is what most debtors need. Being drowned in debt is no fun. The Relief that the debtor gets is well worth the trouble and it will send the debtor back to being a credit worthy individual again.
In New Jersey, there are NJ Bankruptcy lawyers who will give the debtor a free Bankruptcy Consultation. Bankruptcy Law Firms can give the prospective Bankruptcy debtor guidance as to if Bankruptcy is really the right move for them.
2. Loan Modifications: Loans, in all areas could be and should be able to be modified. Generally speaking though, when we speak about loan modifications we think of home loan modifications. Much has been written about home mortgages and the modification process.
Generally, when an individual debtor thinks about loan modifications, he usually contacts their lending institution and requests information on the process. Loan modifications are so popular that most lenders have loan modification departments already set up in their companies. Today,, because it is so common, individual debtors have a good chance on getting a modification of their mortgage. The arrears that the debtor owes usually is rolled into the principal of the loan and paid over time. This is similar to a Chapter 13 Bankruptcy that usually pays off the arrears payments over a space of 3 to 5 years.
3. Negotiate with your creditors: Sometimes it may be a good idea to negotiate with your creditors when faced with financial difficulties. You could negotiate a new monthly payment plan with lower payments to satisfy the creditor while you get on your feet. In the alternative, the debtor can even negotiate a lower payoff of the existing debt and end up paying pennies on the dollar to settle the debt.
4. Do Nothing: Here, if an individual has little income and little property accumulated, the debtor might be better off not doing anything at all and let the debt go. If the debtor lives a simple low income and asset life and plan to do that in the future, they might be Judgment Proof! Judgment Proof simply means that a person has really nothing that can be taken away if they get sued. Simply, when you stop paying creditors, they can and often sue the debtor for the money they are owed. The creditor will then get a Judgment against the debtor for the money the debtor owes. In order for the creditor to collect, the debtor has to have something that the creditor can legally take. Being Judgment Proof simply means that the debtor has nothing that the creditor can legally take. In this case, you still owe the money for the length of time the Judgment is alive, however it is really worthless since the creditor can’t collect.
If a debtor does not have a steady job or other source of revenue that the creditor can collect, then the debtor should not worry about a lawsuit because the creditor can’t collect. If the debtor has a job and they can live on approximately 75 percent of their income, they need not worry about a lawsuit. Finally, if the debtor is without any other assets that can be collected by the creditor, again the debtor need not worry about a lawsuit. Thus, without assets and possessing a low income, the debtor should not worry about judgments against them. The down side of doing nothing when faced with financial difficulties is that the Judgment the creditor gets on the debtor can be renewed. Also, in today’s age of computers, very little can be hidden from the databases of the world. If the debtor gets a financial windfall sometime in the future, it would be fair game for the creditors. Lastly, do not forget that money owed still generates interest as time goes on and the debtor’s debt grows and grows.
To sum up the above article on credit and if it is a blessing, one must look at the benefits versus the negative aspects credit brings to an individual. On the one hand, credit opens up a new world where the small guy can use credit to advance his lifestyle and life in general. However, when there is an interruption in cash flow and debts can’t be paid, bad things can happen.
There are ways to handle credit difficulties and overall, credit should be considered a good thing because of the ways an individual can settle the credit crisis. Debtors that get into a difficult situation can use the system to help themselves to a fresh start. Indeed, many individuals have been in a credit crisis and settled matters via the Bankruptcy system. Bankruptcy, loan modifications and just plain negotiation with creditors are but a few of the ways out.