First Vehicle Miscalculation: Know All the Costs - Financial Literacy

James/Janie Crutcher is 20 years old and lives with his/her grandparents who have taken care of him since childhood. He/she is close to them and sometimes helps out by paying their utility bills. James/Janie manages to save up some money and decides to buy a truck. He/she has a seasonal job during the summer working for a construction company. He/she has about $3,000, in savings, which he/she plans to use as a down payment. However, wiping out his/her savings to get the truck leaves him/her with no financial cushion to deal with surprises and emergencies.

At the car lot, James/Janie impulsively purchases the first truck that he/she sees after he/she is told by the dealer that he/she can afford it and the dealership will approve financing for him/her. James/Janie doesn’t consider the real costs of owning a vehicle, in particular, insurance, fuel, maintenance, and an emergency fund to cover, at least, three months of car payments in the event he/she loses his/her job.

At this point, things begin to go wrong for James/Janie. Shortly after he/she buys the truck, his/her grandparents' health begins to fail. James/Janie now feels obligated to pay their medical bills in addition to taking care of his/her own financial obligations. That’s when he gets his/her first surprise – his/her first insurance bill and it is a big one,

As the car payments come due each month, James/Janie discovers that he/she is unable to keep up with all of his/her bills, including the truck and insurance payments. Nine months later, he/her files for Chapter 13 (wage-earner plan) bankruptcy hoping that he/her can work out a payment plan with his/her creditors that will allow him/her to keep his/her truck, his/her large screen TV, and his/her motocross gear.

James/Janie is attempting to work out a deal to satisfy his/her creditors. However, when the financiers at the dealership learn that he/she is behind on his/her car payments and has been dropped from his/her insurance for nonpayment, they file a petition with the bankruptcy court to lift the automatic stay that protects all of James/Janie's property.

Things get worse for James/Janie. Although one of his/her primary reasons for filing for bankruptcy is to save his/her truck, the bankruptcy judge rules in favor of the dealership. Because James/Janie has not met his/her contractual obligations and the other, car-related costs, the judge allows the dealership to repossess the truck.

The dealership sells the truck at auction for the wholesale (not retail) value. This means that, in addition to losing the truck and the money that he already put into it, James/Janie still owes the dealership’s financing company $22,000 for a car he/she no longer possesses. How much of this he/she ultimately will have to pay will depend on the findings of the bankruptcy court.

Without transportation to and from work, James/Janie loses/her his job. With no income to pay his/her creditors, he/she now is forced to withdraw his/her petition for Chapter 13 bankruptcy (wage-earner plan) and file for Chapter 7 bankruptcy (liquidation) instead. 

Discussion Starter Questions

The scenario and questions are meant to stimulate critical thinking and discussions about life decisions that may put young people on the path to bankruptcy court.

1. List James’/Jamie’s needs versus wants in this scenario. How could these wants be managed to prevent a financial crisis?
2. Identify some decision points at which James/Jamie made his/her financial situation worse. How could he/she have handled each of these turning points differently?
3. What safeguards should James/Jamie have put in place to protect his/her financial stability — and avoid the risk of facing bankruptcy?
4. What are some financial setbacks/surprises that James/Jamie should anticipate and prepare for in his/her teens, 20s and 30s?
5. When James/Jamie realizes he/she is in trouble, what are some steps to take to put on the brakes?
6. What are some factors a judge may consider when deciding whether James/Jamie will keep his/her vehicle (motorcycle, truck, and car)?
7. Given this scenario, can student loans forgiven?
8. What kinds of debts cannot be discharged?
9. What are some of the short-term and long-term impacts on someone’s professional and personal life that stem from filing for bankruptcy protection?
10. What are some typical, student spending habits that can put someone’s future in jeopardy?

Examples of Responses to Discussion Starter Questions

The general approach taken in these responses can be used with each of the scenarios.  The boldface type identifies the point of each question.  

1. Needs v. Wants.  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 any scenario are rent, transportation, basic living expenses and financial obligations, including student loans, car payments, and monthly bills.
   
   The protagonist’s wants are easy to identify. Some of the ways to manage finances and prevent a financial meltdown include creating and maintaining a budget, building in spending for entertainment and travel, etc.  The protagonist also could have scaled down her current spending and set short-term and long-term financial goals.
    
2. Decision Points.  Some points at which protagonists can make their financial situation worse include the following:
   1. Deciding to buy everything, or to buy expensive items all at once, rather than developing a scaled-down, incremental plan;
   2. Putting optional expenses on a credit card;
   3. Charging more than what could easily pay off in one billing cycle;
   4. Accumulating too many credit cards;
   5. Maxing out the credit card limits; and
   6. Only making the minimum monthly payment on each card.
       
3. Safeguards. To protect finances, some safeguards that could be put into place include:
   1. Establishing a budget that includes spending money;
   2. Setting up automatic savings from paychecks;
   3. Building up a cash reserve to cover living expenses for six months to provide a safety net; and
   4. Building up an emergency fund.
       
4. Anticipation.  Some financial challenges that should be anticipated and prepared for at this stage in the teen years, 20s and 30s include: Saving to create an emergency found that will cover: 
   1. A long period of unemployment during job searches;
   2. Getting a job and establishing a work-appropriate wardrobe;
   3. Working part time or being under employed;
   4. Being financially self sufficient;
   5. Getting a car;
   6. Getting an apartment (deposit, plus first and last month’s rent).
       
5. Brakes.  When the protagonist in the scenario realizes he/she is in financial trouble some steps can be taken to put on the brakes. They include:
   1. Cutting up credit cards but not closing accounts;
   2. Scaling down the standard of living;
   3. Getting a roommate;
   4. Getting a second job, even if it is only occasional work.
       
6. Car Debt.  If it is determined that the protagonist can continue making car payments after discharging the credit card debt, the car note, sometimes, can be reinstated so that the car can be kept.
    
7. Student Loans.  The protagonist, probably, will not be able to get 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.
    
8. Nondischargeable Debts.  In addition to student loans, other debts that cannot be discharged include:  
   1. Income taxes for the three years preceding the bankruptcy filing
   2. Fraudulently incurred obligations (that is, providing a creditor, such as a credit card company, with false or incomplete financial statements)
   3. Certain domestic obligations, such as child support and alimony
   4. Debts arising from the debtor's willful and malicious injury of person or property
   5. Personal injury obligations incurred as a result of the debtor's driving while intoxicated.
      ​
9. Impact.
   1. Some of the short-term results of filing for bankruptcy might include:
      1. Protection of assets from collection
      2. The establishment of a repayment plan that is less burdensome.
      3. The possibility that -- after a set number of months of reliable payments are made — the remaining debts may be discharged.
   2. ​Some of the long-term consequences that are less favorable might include:
      1. Bankruptcy damages a credit rating for 10 years.
      2. It also will jeopardize opportunities for renting an apartment, landing a job; getting a mortgage; or getting into a serious personal or business relationship.
          
10. Self-Awareness. Students discuss spending habits that could get them into financial trouble, e.g. using credit cards for consumables – food, cosmetics, etc.