Ms. Susan Jackson's first job after graduating from college with a marketing degree is as an assistant manager at a Saks Fifth Avenue store. She is excited about her first apartment and her career in a new city. Her base pay is $36,000, plus benefits, including health insurance. She finds an apartment and it has a lot of potential but needs to be redecorated. She decides to pay for most of these redecorating expenses with a credit card. Although she began with only one card, it has a low credit limit, so she applies for more. When these cards also have low credit limits, she applies for still more, including many retail cards, and eventually ends up with 26 credit cards. She makes charges to each one. The cost of furnishing her apartment, establishing her professional wardrobe, making frequent purchases at the mall, and going to restaurants and concerts in the city are all charged to her cards. She uses her cards to pay for the Caribbean scuba diving trip that she could not pass up, the monthly payment on her new car, and the monthly payment on her student loans. Although she has stretched herself to her financial limit by accumulating $115,000 in debt over the course of four years, Susan still manages to "just squeak by" and make the minimum payments on each of her cards every month. Then things start to go really wrong.
As a result of corporate downsizing, Susan loses her job. She quickly depletes the $1,500 in her savings account and is worried about how she will make her rent. After being unemployed for a month, she gets a job at another Saks Fifth Avenue, but it is not a managerial job and is only part time. As a result, Susan must deal with a difficult situation. Her pay is cut by 20 percent. Her medical insurance is no longer covered by her employer. She must pay a higher rate on her credit card because she made late payments while she was unemployed. Susan is no longer able to make the minimum credit card payments each month and is struggling to make her rent and car payments. When one credit card company begins proceedings to garnish her wages to satisfy a judgment that it won against her, she files for Chapter 13 bankruptcy (reorganization). The judge approves the reorganization plan and, for the next 60 months, part of her paycheck will be garnished. If she fulfills the requirements of the reorganization plan, the remaining part of her debt will be discharged.
Chapter 13--The chapter of the Bankruptcy Code providing for adjustment of debts of individuals with regular income, often referred to as a "wage-earner" plan. Chapter 13 allows debtors to reorganize their finances, keep property, and use the disposable income to pay debts over time, usually three to five years.
discharge--A release of a debtor from personal liability for certain dischargeable debts. A discharge releases a debtor from personal liability for certain debts known as dischargeable debts and prevents the creditors owed those debts from taking any action against the debtor or the debtor's property to collect the debts. The discharge also prohibits creditors from communicating with the debtor regarding the debt, including through telephone calls, letters, and personal contact.
nondischargeable debt--A debt that cannot be eliminated in bankruptcy
U.S. Trustee--An officer of the U.S. Department of Justice responsible for supervising the administration of bankruptcy cases, estates, and trustees, monitoring plans and disclosure statements, and other statutory duties.
wage garnishment--A legal proceeding whereby a plaintiff or creditor seeks to subject to his or her claim the future wages of a debtor. In other words, the creditor seeks to have part of the debtor's future wages paid to the creditor for a debt owed to the creditor.
- First-Job Euphoria: Discussion Questions
- Identify Susan's needs versus her wants in this scenario. How could she have managed her wants and prevented a financial crisis?
- Identify some decision points at which Susan made her financial situation worse, or points at which she could have made it better.
- What safeguards should Susan have put into place to protect her finances--and avoid the risk of facing bankruptcy--as soon as she was hired for her first job?
- What are some financial pitfalls/surprises that Susan should anticipate and prepare for at this stage in her life?
- Before considering bankruptcy, what are some other options available to Susan?
- Susan does not own her car outright. She is still making payments on it. What are some factors the judge may consider when deciding whether she will lose her car?
- Will Susan be able to get her student loans forgiven?
- What other kinds of debts cannot be discharged?
- What are the short-term and long-term consequences for Susan of filing for bankruptcy protection?
- Points to Look for in Student Responses to Discussion Questions
The scenarios and questions are meant to stimulate critical thinking and discussion about life decisions that bring people to bankruptcy court. This answer key begins to address the issues raised; however, it is by no means exhaustive. Students are encouraged to be as specific as possible in their analysis.
- Scenario 1: First-Job Euphoria Discussion
- Using this scenario as a springboard for differentiating between basic needs and wants, students are asked to identify both. Among the needs that students are likely to find in the scenario are rent, transportation, basic living expenses and financial obligations, including her student loans and bills. Susan's wants include redecorating the apartment, shopping trips to the mall, dinners out with friends, and the scuba diving trip. Some of the ways Susan could have managed her wants and prevented a financial crisis include creating and maintaining a budget (and including in it such items as a vacation account) that would allow her to live within her means. She also could have scaled down her current spending and set short-term and long-term budget goals.
- Some points at which Susan made her financial situation worse include the following: (1) deciding to redecorate the apartment on a grand scale, rather than developing a scaled-down, incremental plan; (2) putting the redecorating expenses on her credit card; (3) buying more than she could easily pay off in one billing cycle; (4) accumulating 26 credit cards; (5) making charges, totaling $115,000, on her cards; and (6) only making the minimum payment on each of her cards. Ask students to be very specific about the decision points and how she could have avoided her financial crisis. Probe students to differentiate Susan's needs from her wants and how she could have managed a scaled-down version of her wants. She could have limited her redecorating to a few, affordable purchases; she could have gotten a tan at the pool at her apartment building instead of the scuba diving trip; she could have maintained a maximum of two credit cards; and so on.
- To protect her finances and avoid the risk of facing bankruptcy, some safeguards that Susan could have put into place as soon as she was hired on her first job include (1) establishing a budget within her means; (2) setting up automatic savings from her paycheck; and (3) begin building up a cash reserve to cover living expenses for six months.
- Some financial pitfalls/surprises that Susan should anticipate and prepare for at this stage in her life include (1) being laid off; (2) reductions in pay; (3) loss of health benefits; (4) cost of living increases, and so on.
- Before considering bankruptcy, some other options available to Susan include (1) cutting up her credit cards; (2) scaling down her standard of living; (3) contacting her creditors about adjusting her payment plan; and (4) getting a second job, even if it is only occasional work.
- If it is determined that Susan can continue making her car payments after discharging the credit card debt, she should be able to reaffirm the car note and keep the car.
- Susan probably will not be able to get her student loans discharged. Such debts are not discharged unless the debtor can prove that repaying the student loans would impose an undue hardship on the debtor.
- In addition to student loans, other types of debts that cannot be discharged include the following:
- Income taxes for the three years preceding the bankruptcy filing;
- Fraudulently incurred obligations (that is, providing a creditor such as a credit card company with false or incomplete financial statements);
- Certain domestic obligations, such as child support and alimony;
- Debts arising from the debtor's willful and malicious injury of person or property; and
- Personal injury obligations incurred as a result of the debtor's driving while intoxicated.
- Some of the short-term consequences for Susan of filing for bankruptcy are the protection of her assets from collection and the establishment of a repayment plan that is less burdensome. One of the long-term consequences for Susan is the possibility that--after 60 months of reliable payments--her remaining debts may be discharged. Other long-term consequences are less favorable to Susan. Bankruptcy will damage her credit rating for 10 years. This may not only adversely affect her when she applies for credit, including when her apartment rental lease comes up for renewal, but also when she seeks future employment.