Section 8.3 High-Interest Loans
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debt or allow for repayment under court protection. Bankruptcy is a court order
that excuses the debtor from having to repay some or all of his or her debts. The
court appoints a bankruptcy trustee to decide how to use the debtors’ assets to
repay those owed.
There are two main types of bankruptcy—Chapter 7 and Chapter 13.
Chapter 7 bankruptcy requires that the assets of the person or business be
sold and the proceeds used to pay as much debt as can be repaid. Then, the
remaining debt is cancelled. The debtor may be allowed to keep some personal
items, but must make an attempt to pay off his or her bills. Chapter 7 bankruptcy
stays on the debtor’s credit report for ten years.
Chapter 13 bankruptcy sets up a payment plan for the debtor, rather than
requiring that he or she sell all of his or her assets. The court gives protection to
the debtor from those to which money is owed while the debt is being repaid.
Chapter 13 bankruptcy stays on the debtor’s credit report for seven years.
Bankruptcy is a drastic step and should not be undertaken without a great
deal of thought. The consequences of fi ling bankruptcy have a signifi cant impact
on an individual’s fi nancial goals as well as his or her ability to get credit in the
future.
Checkpoint 8.3
1. Rita is considering a payday loan for $330. The payday lender charges 24%
for a brokerage fee plus 0.3% in interest charges for a 14-day term loan. How
much will Rita pay back at the end of the 14 days?
2. Sherman is considering a payday loan for $295. The payday lender charges
23.5% for a brokerage fee plus 0.4% in interest charges for a 14-day term
loan. How much will Sherman pay back at the end of the 14 days?
3. Lynda is trying to decide if she wants to get a title loan on her car that is
worth $4,150. Check City will lend up to 18% of the value of a vehicle for a
30-day loan term. Check City charges a fee of 22.5% of the loan amount. If
Lynda decides to get the full amount of the loan, how much would she have
to pay back at the end of the 30 days?
4. Keenan pawns his trombone and receives $65. Pawn Towne off ers 30-day
loans for a 1.65% interest charge and a 23.5% fee for storage and handling.
How much will Keenan have to pay back in 30 days in order to reclaim his
trombone?
5. Joyetta pawns a gold necklace and receives $115. Best City Pawn off ers 30-
day loans for a 1.85% interest charge and a 21% fee for storage and handling.
How much will Joyetta have to pay back in 30 days in order to reclaim her
necklace?
fyi
The Bankruptcy Abuse
Prevention and Consumer
Protection Act of 2005
requires that those
considering bankruptcy
attend credit counseling
classes before fi ling
for bankruptcy. The
National Association of
Credit Counseling and
the National Consumer
League are important
resources for fi nding
accredited fi nancial
counselors.