Bryant - Course 1. Introduction to Financial Planning - Module 11. Credit and Debt Management

Question 1

Debt Ratio = ?

Answer 1

Debt Ratio = Debt or Liabilities ÷ Total Assets

Question 2

Long-Term Debt Ratio = ?

Answer 2

Long-Term Debt Ratio = Total Income Available for Living Expenses ÷ Total Long-Term Debt Payment

The long-term debt ratio relates the amount of funds available for debt repayment to the size of the debt payments. In effect, this ratio is the number of times you could make your debt payments with your current income. It focuses on long-term obligations such as home mortgage payments, auto loan payments, and any other long-term credit obligations.

A long-term debt coverage ratio below 2.5 is not financially desirable.

Question 3

Debt Limit Ratio = ?

Answer 3

Total Monthly Non-Mortgage Debt Payments ÷ Total Monthly Take-Home Pay

Mortgage payments aren’t included in the debt limit ratio because this ratio measures your commitment to consumer credit, which tends to be a more expensive type of debt.

In order to maintain a reasonable degree of flexibility, ideally you should strive to keep this ratio below 15 percent.

Question 4

Debt ratio measures __

Answer 4

measures total liabilities against total assets

Question 5

What is the debt resolution rule?

Answer 5

Financial planners use the debt resolution rule to help control debt obligations.

These exclude borrowing associated with education and home financing.

The debt resolution rule forces you to repay all your outstanding debt obligations every 4 years.

Question 6

Banks typically let you borrow up to ? percent of the equity in your home.

Answer 6

With a home equity loan, or a home equity line of credit (HELOC), your credit is secured by your ownership in your home. Banks typically let you borrow up to 75 to 80 percent of the equity in your home. The equity in your home is the difference between the appraised fair market value of your home and the amount owed on the mortgage.

Question 7

Is a home equity loan a closed-end or open-end credit?

Answer 7

Home equity loan is Closed-end credit.

Question 8

Is a home equity line of credit a closed-end or open-end credit?

Answer 8

Home equity line of credit is Open-end credit.

Question 9

Describe Home equity loans

Answer 9

Home equity loans are second mortgages that are taken as a lump-sum payment and repaid monthly over a timeframe established by the lender. The interest rate on the loan is fixed and will not fluctuate over the life of the loan. Interest rate charges are less than other consumer loans, but higher than mortgage interest rates. A benefit is that the repayment period is much shorter than a 30 year mortgage, typically from 5 to 15 years, but additional money cannot be borrowed until the loan is repaid in full. As with both a home equity loan and a line of credit, the principal must be repaid once the property is sold.

Question 10

Describe Home equity lines of credit

Answer 10

Home equity lines of credit are revolving credit lines similar to credit cards, which allow you to borrow up to a certain amount for the life of the loan. Lenders determine the length of the draw period that money can be withdrawn, typically 5 to 10 years, and the repayment period which may range from 10 to 15 years. Money can be withdrawn as needed in the draw period, and as principal is repaid, more credit up to the credit limit becomes available again. The interest rate is a variable rate that changes every time the Federal Reserve raises or lowers the federal funds rate. Minimum monthly interest payments fluctuate depending on the prevailing interest rate and the balance owed. Payments are flexible since homeowners can choose to pay interest only or a combination of interest and principal payments which stretches payments out over many years, producing small monthly payments.

Question 11

Which of the following types of home equity loans offers a fixed interest rate for the loan repayment term?
* Closed-end credit
* Open-end credit

Answer 11

Closed-end credit

Closed end credit offers a fixed rate; open-end credit offers a variable interest rate.

Question 12

When can you deduct the interest paid on home equity loans and lines of credit?

Answer 12

In the past interest paid on home equity loans was typically deductible, but The Tax Cuts and Jobs Act of 2017, suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build, or substantially improve the taxpayer’s home that secures the loan.

Question 13

How much itemized deduction is allowed for interest on principal residence and second residence purchase, construction, or improvement mortgages?

Answer 13

The itemized deduction for interest on principal residence and second residence purchase, construction, or improvement mortgages up to a combined $750,000 for new debt incurred after December 15, 2017.

Question 14

What is a single-payment or balloon loan?

Answer 14

A single-payment or balloon loan: A loan that’s paid back in a single lump-sum payment at maturity, or the due date of the loan, which is usually specified in the loan contract.

Question 15

What is an installment loan?

Answer 15

Installment Loans call for repayment of both the interest and the principal at regular intervals, with the payment levels set in such a way that the loans expire at a preset date.

Question 16

What’s the difference bewteen a Secured and Unsecured Loan?

Answer 16

Secured and Unsecured Loans differ in the guarantee required. A secured loan is guaranteed by a specific asset, while an unsecured loan requires no collateral.

Question 17

What are home equity loans?

Answer 17

Home Equity Loans are secured by the ownership of your home in the form of a second mortgage.

Question 18

What are Automobile Loans?

Answer 18

Automobile Loans are secured loans made specifically for the purchase of an automobile, with the automobile being purchased used as the collateral.

Question 19

Why are home equity loans popular? (Select all that apply)

They are usually available at a low interest rate.
They may provide tax benefits if used for home improvements.
They involve long-term payments.
They put your home at risk.

Answer 19

They are usually available at a low interest rate.
They may provide tax benefits if used for home improvements.
They involve long-term payments.

Home equity loans are popular as they are available at a low interest rates, can provide itemized income tax deduction and the repayment is stretched over a long span.

Question 20

What kind of loan is paid back in a single lump-sum payment at maturity?

Answer 20

Single payment or Balloon Loan

Question 21

What kind of loan calls for repayment of both interest and principal at regular intervals?

Answer 21

Installment Loan

Question 22

What is a consumer loan with variable interest payments?

Answer 22

Variable-Rate Loan

Question 23

What is a loan that does not require collateral?

Answer 23

Unsecured Loan

Question 24

What Act did Congress pass in 1971 and subsequently amended it to help ensure that consumers’ credit reports are accurate?

Answer 24

Congress passed the Fair Credit Reporting Act (FCRA) in 1971 and subsequently amended it to help ensure that consumers’ credit reports are accurate. Under the FCRA, you have the right to view your credit report and you should do so, since almost half of all credit reports contain inaccurate, misleading, or obsolete material.

A federal law that was recently passed to combat identity theft allows individuals to request a free copy of their credit report once a year, from the three major credit-reporting companies. Call 877-322-8228 or go to annualcreditreport.com to request one.

Question 25

What are your credit rights with credit bureaus?

Answer 25

If the information in your file isn’t accurate or complete, the credit bureau must investigate any errors you point out and make corrections. If the credit bureau investigates and determines that the information in your report is accurate, you have the right to have in your file a statement presenting your view of the issue. This statement gives you the chance to dispute the accuracy of information in your file. In any case, if you do find inaccuracies, they should be pointed out immediately.

The FCRA also limits the length of time damaging information can remain in your file. Bankruptcy information can remain in your file for only ten years, and other negative information must be removed from your file after seven years.

The FCRA also limits access to your credit file to those who have a legitimate right to view it, such as a financial institution considering extending you credit, an employer, or a company doing business with you. You also have the right to know who has seen your credit report. You can do so by contacting a credit bureau agency.

Question 26

What is Moody’s?

Answer 26

Moody’s is a bond credit rating company.

Question 27

What is a credit counselor?

Answer 27

A trained professional specializing in developing personal budgets and debt repayment programs. A credit counselor can be helpful in organizing your finances and developing a workable plan to pay off your debts. However, as is always the case in personal finance, you must be careful in choosing a credit counselor.

One good source for a credit counseling is the Consumer Credit Counseling Service (800-388-2227, nfcc.org), which is a nonprofit agency affiliated with the National Foundation for Consumer Credit. This organization has offices across the nation.

Question 28

What is a debt consolidation loan?

Answer 28

A debt consolidation loan is simply a loan used to pay off all your current debts. The purpose of a loan of this kind is to lower your monthly payment. A debt consolidation loan doesn’t eliminate your debt problems. It merely restructures the payments associated with paying off that debt. Again, this isn’t the optimum solution. The best solution is to take control of your borrowing from the onset.

Question 29

What are the 5 major consumer credit laws?

Answer 29

The major consumer credit laws are:

Truth in Lending Act
Fair Credit Billing Act
Equal Credit Opportunity Act
Fair Debt Collection Practices Act
Fair Credit Reporting Reform Act

Question 30

Which Act was passed in 1968 and requires lenders to disclose the true cost of consumer credit, explaining all charges, terms and conditions involved. It also requires that the consumer be provided with the total finance charge and annual percentage rate on the loan?

Answer 30

The Truth in Lending Act

The Act was amended twice, first to prohibit lenders from sending unauthorized credit cards and to limit a cardholder’s liability to $50.00 for unauthorized use of an account. Then, it was amended again in 1982 requiring installment credit contracts to be written in plain English.

Question 31

Which Act in 1975 sets procedures for correcting billing errors on open credit accounts? It also allows consumers to withhold payment for defective goods purchased with a credit card. In addition, it sets limits on the time some information can be kept in your credit file.

Answer 31

The Fair Credit Billing Act (1975)

Question 32

Which Act in 1975 prohibits credit discrimination on the basis of sex and marital status? It also requires lenders to provide a written statement explaining any adverse action taken.

Answer 32

The Equal Credit Opportunity Act (1975)

Question 33

Why was The Equal Credit Opportunity Act amended in 1977?

Answer 33

The amendment prohibits credit discrimination based on race, national origin, religion, age, or receipt of public assistance.

Question 34

Which Act in 1978 prohibits unfair, abusive, and deceptive practices by debt collectors, and establishes procedures for debt collection?

Answer 34

The Fair Debt Collection Practices Act (1978)

Question 35

What does the the Fair Credit Reporting Reform Act of 1996 (updated version of the Fair Credit Reporting Act of 1971) require?

4 things

Answer 35

The Fair Credit Reporting Reform Act of 1996 (updated version of the Fair Credit Reporting Act of 1971) requires that consumers be provided with the name of any credit agency supplying a credit report that leads to the denial of credit.

It gives consumers the right to know what is in their credit reports and challenge incorrect information.

It also requires that employers get written permission from current or prospective employees before reviewing their credit files.

In addition, it allows consumers to sue creditors if reporting errors are not corrected.

Question 36

What is The Gramm-Leach Bliley Financial Modernization Act of 1999 (GLB Act)?

Answer 36

The Gramm-Leach Bliley Financial Modernization Act of 1999 (GLB Act) contains provisions that safeguard the privacy of consumer information held by financial institutions.

These provisions protect an individual’s personal financial information by placing restrictions on when firms can disclose this information to others.

The GLB Act requires that financial institutions send privacy notices to consumers that explain their information-sharing practices, and which give individuals an opportunity to “opt-out” or decline to have some of their personal information shared with third parties.

Question 37

What are the three major components to the privacy requirements?

Answer 37

1. The Financial Privacy Rule regulates how financial institutions may gather and subsequently disclose personal financial information to others. This rule also places restrictions on the use of information that companies receive from third parties, whether these companies are financial institutions or not.
2. The Safeguards Rule requires financial institutions to create and implement procedures to protect the personal financial information they obtain from customers. This rule also applies to companies, such as credit bureaus, who receive this information directly from other financial institutions.
3. The Pretexting Provisions protect individuals whose personal financial information has been obtained by others under false pretenses.

Question 38

Is a small financial planning practice with no affiliates considered a financial institution under the Privacy Rule under the Gramm-Leach Bliley Financial Modernization Act of 1999?

Answer 38

Yes.

The size of the financial planning practice and number of affiliates is not relevant under the Privacy Rule.

Question 39

In providing privacy protection to customers, which of the following may be considered public information?

• The fact that someone is a customer of a financial institution
• Information the customer provides on an application
• The customer’s telephone number
• Information from a “cookie” obtained by using a website

Answer 39

The customer’s telephone number

The test for determining what information is public is if a financial institution has a reasonable basis to believe that the information is widely available to the general public, such as in a telephone directory or on a website. The company is responsible for investigating whether the information is public knowledge or not, if it is not readily apparent.

Question 40

Which Act provides customers and consumers with the opportunity to opt-out or prohibit the financial institution from disclosing certain non-public personal financial information to third parties?

Answer 40

The GLB Act provides customers and consumers with the opportunity to opt-out or prohibit the financial institution from disclosing certain non-public personal financial information to third parties. The privacy notice or a separate opt-out notice informs individuals how they can prevent this sharing of information, by providing them with a toll-free telephone number to call, or a detachable form with a pre-printed address to send back to the company. Customers are given a “reasonable opportunity” to respond to this notice, such as 30 days from the date the notice is mailed, before their information is sent to others. The financial institution is obligated to comply with the individual’s decision to opt-out of the disclosures once proper notification is received.

Question 41

Under which situations do individuals have no control over the release of their personal information to third parties?

Answer 41

Examples are:
* when disclosures are required by law
* when financial institutions share information with other companies who provide essential services for them, such as data processing services.
* Customer data is also permitted to be shared with firms that market the financial institution’s products and services.

Question 42

What can an individual do to prevent others from opening a new account in their name?

Answer 42

They should freeze their credit files to prevent others from opening a new account in their name. Simply follow the procedures outlined in your client’s home state at ConsumersUnion.org. A freeze will not adversely affect a client’s credit score and the freeze can be lifted temporarily if needed to apply for a loan.

Question 43

What does The Fair Credit Reporting Act ensure?

Answer 43

The Fair Credit Reporting Act ensures:
* Accuracy of credit reports
* Right to view credit report

Your credit rights: Congress passed the Fair Credit Reporting Act (FCRA) in 1971 and subsequently amended it to help ensure that consumers’ credit reports are accurate.

Question 44

Which Act safeguards the privacy of consumer information held by financial institutions and imposes restrictions on when personal financial information can be disclosed to third parties?

Answer 44

Privacy policies: The Gramm-Leach Bliley Act safeguards the privacy of consumer information held by financial institutions. It imposes restrictions on when personal financial information can be disclosed to third parties.

Question 45

Which Act prohibits unfair, abusive and deceptive practices by debt collectors?

Answer 45

The Fair Debt Collection Practices Act

Question 46

What Act sets procedures for billing errors on open credit accounts?

Answer 46

The Fair Credit billing Act

Question 47

Which Act prohibits the discrimination on the basis of sex and marital status?

Answer 47

The Equal Credit Opportunity Act

Question 48

Which Act requires the lender to disclose the true cost of consumer credit?

Answer 48

The Truth in Lending Act

Question 49

What does a credit counselor do? (Select all that apply)

• Helps sell assets and pay off debts.
• Develops personal budgets.
• Develops a workable plan to pay off your debts.
• Advises in bankruptcy situations.

Answer 49

Develops personal budgets.
Develops a workable plan to pay off your debts.

A credit counselor is a trained professional specializing in developing personal budgets and debt repayment programs. A trustee arranges to collect and sell all of your nonexempt property and pays the creditors. A credit counselor does not help sell assets and pay off debts or make decisions about bankruptcy.

Question 50

Privacy notices are designed to do which of the following? (Select all that apply)

• Explain how a financial institution collects, protects and discloses personal financial information.
• Give customers an opportunity to opt-out of sharing their personal information with third parties.
• Explain a company’s privacy policy to consumers by giving them an initial notice at the beginning of the engagement, and annually.

Answer 50

Privacy notices are designed to:

• Explain how a financial institution collects, protects and discloses personal financial information.
• Give customers an opportunity to opt-out of sharing their personal information with third parties.

Privacy notices explain how a financial institution collects, protects and discloses personal financial information, and how customers can opt-out of certain disclosures. However, only customers who have a relationship with the institution, not consumers, receive initial and annual privacy notices.

Question 51

What are the major causes of personal bankruptcy in America today?

Answer 51

**Divorce, job loss, housing foreclosures, and illness **remain the major causes of personal bankruptcy in America today.

Question 52

Describe The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)

Answer 52

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) went into effect on October 17, 2005.

This law changed key provisions in previous bankruptcy laws, by making it more difficult for consumers to file for bankruptcy and receive a discharge from debts. The new law also limits debt relief for individuals, since more debt is expected to be repaid to creditors now. In many cases consumers must hire an attorney, pay administrative fees, and pay higher filing fees for Chapter 7 bankruptcy protection.

An immediate benefit of filing for bankruptcy under Chapters 7 or 13 is that an automatic stay is issued that stops creditors from attempting to collect what is owed them.

Automatic stays also stop foreclosures, property repossessions, and sales of property while repayments are made.

Automatic stays do not apply to alimony or child support payments or criminal suits.

Question 53

What is included in a bankruptcy estate?

Answer 53

A bankruptcy estate includes “all legal or equitable interest of the debtor in property.” Property the debtor does not own outright, or that has been transferred to a spouse without fraudulent conveyance, is not part of the bankruptcy estate.

Non-exempt property interests that typically must be given up include:
* Cash, bank accounts, stocks, bonds and other investment property
* Second homes or vacation homes
* Second cars or trucks
* Stamps, coins or other collections
* Family heirlooms

Question 54

What items are debtors allowed to keep certain property interests from creditors regardless of whether creditors are paid?

Answer 54

Every state has passed exemption laws that allow debtors to keep certain property interests from creditors regardless of whether creditors are paid.

Examples include:
* A portion of home equity
* Clothes
* Household items, furnishings and appliances
* Cars of limited value
* Tools used in business
* Jewelry, up to $1,600
* Pensions
* Public benefits such as Social Security, welfare and unemployment compensation accumulated in a bank account.

Question 55

Each of the following is afforded an exemption for bankruptcy proceedings, meaning the debtor can keep the property regardless of whether the creditors are paid except:
* Home
* Pension
* Public benefits such as Social Security
* A second automobile

Non-exempt property interests that typically must be given up in bankruptcy include cash, bank accounts, stocks, bonds; second homes or vacation homes; second cars or trucks; stamps, coins or other collections; family heirlooms.

Answer 55

A second automobile

Non-exempt property interests that typically must be given up in bankruptcy include cash, bank accounts, stocks, bonds; second homes or vacation homes; second cars or trucks; stamps, coins or other collections; family heirlooms.

Question 56

Describe Chapter 7 Bankruptcy

Answer 56

• Chapter 7 is considered a liquidation type of bankruptcy procedure.
• Chapter 7 eliminates a consumer’s debt by having a trustee sell some of the debtor’s personal property to repay their creditors. In reality, many debtors do not own any assets beyond what the law allows them to keep, so assets cannot actually be sold to repay their debt.
• Debtors in this situation should choose to file Chapter 7 rather than Chapter 13 since they would not lose any of their property to a forced sale of their assets.

Question 57

Filing requirements for Chapter 7 became more stringent with the passage of the new bankruptcy law. What was the intent?

Answer 57

Filing requirements for Chapter 7 became more stringent with the passage of the new bankruptcy law. The intent of the new bankruptcy law was to prohibit high-income debtors from wiping out their credit card debt without any repayment. Now debtors must pay all charges made to credit cards within three months prior to filing.

Question 58

Individuals who file for Chapter 7 must have their finances examined to determine if they are capable of repaying their creditors.

What are the 2 tests to determine if a person can file for Chapter 7?

Answer 58

Individuals who file for Chapter 7 must have their finances examined to determine if they are capable of repaying their creditors.

The first step is to measure their current monthly income against their state’s median income amounts. Current monthly income is averaged over the six month period prior to filing for bankruptcy. If income is less or equal to the state’s median, then a person can file for Chapter 7.

If income exceeds the median, then a “means test” must be applied.

The purpose of the means test is to determine whether there is enough disposable income available to repay at least a portion of unsecured debts over a five-year repayment period.

Disposable income is determined by subtracting certain allowed expenses and required debt payments from current income. The higher the disposable income, the more likely that Chapter 7 will not apply, and debtors would need to file for Chapter 13 bankruptcy protection instead.

Question 59

When are most debts discharged after the date of filing for Chapter 7?

What obligations must still be repaid?

Answer 59

Most debts are discharged after 115 days from the date of filing for Chapter 7, but certain obligations must still be repaid.

These include outstanding payments for child support, alimony, income taxes less than three years past due, student loans and secured debt.

Debt that is secured by collateral such as home mortgages and car loans are expected to be repaid, and creditors can repossess the collateral property if necessary.

Question 60

Are co-debtors are still on the hook for debt repayments?

Answer 60

Co-debtors are still on the hook for debt repayments.

If someone has cosigned a loan or if a business partner is equally liable for the debt, then bankruptcy will not wipe out the debt and the co-debtor is legally responsible for repaying it.

However, the debtor who has the debt discharged in bankruptcy is no longer responsible for its payment.

Question 61

Describe Chapter 13 Bankruptcy

Answer 61

Chapter 13 allows debtors to keep all of their personal assets, but they are obligated to repay their debt in full, over a period of time.

Homeowners may choose the Chapter 13 bankruptcy option because it protects their homes from repossession as long as they continue to meet their repayment obligations.

Any secured property that was bought within a year of filing must be fully repaid, including cars bought for personal use within the past 2 ½ years.

Question 62

Debtors are eligible to file for Chapter 13 if their secured debt is less than __ and and their unsecured debt (e.g., credit card debt), is less than __ (from 2022)?

Answer 62

Debtors are eligible to file for Chapter 13 if their secured debt (e.g., mortgage or car loans), is less than $1,395,875 (2022) and their unsecured debt (e.g., credit card debt), is less than $465,275 (2022).

These amounts are adjusted for inflation every three years to reflect changes in the Consumer Price Index. The next adjustment will occur on April 1, 2025.

Question 63

How is Chapter 13 bankruptcy’s repayment plan set up?

Answer 63

Chapter 13 requires that the debtor and an attorney draw up a repayment plan based on the debtor’s income, which includes wages, benefit payments, and rental income.

The repayment plan is structured as an installment plan to repay creditors an amount they would have received under Chapter 7 liquidation or more.

Under Chapter 13 a debtor will pay more every month to make payments on their overdue debt along with their current monthly payments.

Debt repayments are made to a trustee until the debts are repaid in full, or until the end of a three to five year period.

Once creditors have been repaid, a discharge is issued.

If debtors get behind on their scheduled payments, they should meet again with their attorney to amend their original repayment plan.

Question 64

When does bankruptcy officially ends under Chapter 7, and under Chapter 13?

Answer 64

Bankruptcy officially ends when assets are distributed to creditors under Chapter 7, and creditors are paid in full under Chapter 13.

The debtor must also complete a personal financial management course from an approved credit counseling agency prior to receiving a discharge of his bankruptcy case. After that, the court closes the case and sends the debtor a copy of the order.

Question 65

What debts that cannot be discharged under Chapter 7?

Answer 65

These include outstanding payments for:
* child support
* alimony
* some taxes
* student loans
* certain condo or co-op fees.
* Secured debt with collateral such as home mortgages and car loans are expected to be repaid, and creditors can repossess the collateral if necessary.

Question 66

How long will credit reports will carry the bankruptcy information?

Answer 66

Debtors will need to reestablish their credit after bankruptcy. Banks and credit card companies will take the bankruptcy into consideration when deciding whether to issue credit or not.

Credit reports will carry the bankruptcy information for up to 10 years.

Question 67

Why are some lenders are willing to issue credit after bankruptcy?

Answer 67

Some lenders are willing to issue credit after bankruptcy since there are many restrictions to filing for another bankruptcy. For example, if a debtor previously filed under Chapter 7 less than 4 years ago and obtained a discharge, or filed for Chapter 13 less than two years ago and obtained a discharge, there may not be a right to discharge in a new bankruptcy filing.

Question 68

What does The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 affect the use of?

Answer 68

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 affects the use of traditional creditor protectors such as:
* state homestead acts
* trusts
* IRAs
* pensions
* 529 savings accounts
* Coverdell Education Savings Accounts (ESAs)

Financial planners need to become familiar with this law to advise their clients on ways to protect their financial assets, and provide them with guidance on potential bankruptcy issues.

Question 69

Which retirement accounts are considered to be exempt assets in federal bankruptcy proceedings?

Answer 69

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made significant changes to the creditor protection afforded to retirement accounts under federal bankruptcy laws.

Now almost all types of retirement accounts are considered to be exempt assets in federal bankruptcy proceedings. These retirement accounts include 401(k)s, 403(b)s, 457 plans, defined benefit plans, profit-sharing and money purchase plans, SEP and SIMPLE IRAs. Bankruptcy protection also extends to rollovers from qualified retirement plans, so that qualified plan assets no longer need to stay within the company’s plan to obtain protection.

Non-qualified annuities do not fall under federal creditor protections, but may still be protected by state law.

For Roth and traditional IRA accounts, bankruptcy protection is limited to an aggregate IRA account value of $1 million, which is adjusted every three years for inflation. As of April 1, 2022 this cap has been increased to $1,512,350 per person, the next adjustment will take place on April 1, 2025.

Question 70

Which retirement accounts are not considered to be exempt assets in federal bankruptcy proceedings?

Answer 70

For Roth and traditional IRA accounts, bankruptcy protection is limited to an aggregate IRA account value of $1 million, which is adjusted every three years for inflation. As of April 1, 2022 this cap has been increased to $1,512,350 per person, the next adjustment will take place on April 1, 2025.

However, this cap does not apply to IRA rollovers from any qualified employer retirement plans, so the exemption remains unlimited for that IRA.

The exemption cap of $1,512,350 only applies to rollovers from one Roth or traditional IRA account to another Roth or traditional IRA account, not to SEP or SIMPLE IRAs.

Consequently, SEP or SIMPLE IRAs should not be rolled over into traditional or Roth IRA accounts or they will lose their unlimited creditor protection.

Financial planners should advise clients to keep good records when rolling over accounts for tracking purposes. Presently, there is no guidance from the IRC regarding how the cap is applied to IRAs funded with both rollover and regular contributions.

Question 71

People who file for bankruptcy within __ days of relocation must do so from the state the homeowners moved from.

Answer 71

Many states have homestead exemptions that protect all or a portion of a home’s value from creditors. The new bankruptcy law places caps on the amount of home value that can be protected, for people who have relocated within the past 3 ½ years.

People who file for bankruptcy within 720 days of relocation must do so from the state the homeowners moved from.

Federal legislation also supersedes any state legislated provisions.

Question 72

How does the new bankruptcy law provide additional protection for assets held in 529 college savings accounts and Coverdell ESAs?

Answer 72

The new bankruptcy law provides additional protection for assets held in 529 college savings accounts and Coverdell ESAs that were contributed more than two years before a bankruptcy filing.

Account assets are excluded from the bankruptcy estate if the beneficiary is the debtor’s child, step-child, grandchild, or step-grandchild, and if the assets did not exceed any amounts allowed to be contributed per beneficiary.

Contributions made from one year to two years ago for these beneficiaries are only protected for up to $5,000 per beneficiary.
There are no protections for contributions made less than one year from a bankruptcy filing.

Question 73

Financial planners can give their clients sound advice on ways to protect their assets from potential creditor claims or exclude them from bankruptcy.

What can they recommend? List 5 things.

Answer 73

They can recommend:
* Obtaining umbrella policies and other insurance protection.
* Maximizing retirement accounts.
* Funding education accounts.
* Re-titling personal and business property.
* Transferring assets early on to avoid fraudulent transfers.

Question 74

What is a liquidation type of bankruptcy that requires a debtor to sell certain assets to repay their creditor debt?

Answer 74

Chapter 7

Some debt cannot be eliminated such as child support, alimony, taxes, student loans and loans with secured collateral.

Question 75

Which type of bankruptcy involves repayment of the debt over a period of time, according to a payment plan created by the debtor and an attorney?

Answer 75

Chapter 13

Question 76

In Chapter 7, which of the following types of debts cannot be discharged by bankruptcy? (Select all that apply)

• Credit card bills
• Student loans
• Child support payments
• Debt incurred by farmers
• Secured debt with collateral
  The debtor is responsible for paying child support payments and student loans, which are not discharged by bankruptcy, and debt secured by collateral such as homes and cars can be repossessed for repayment. Chapter 7 can eliminate credit card debt in many cases, and debt incurred by farmers is subject to Chapter 12.

Answer 76

• Student loans
• Child support payments
• Debt incurred by farmers
• Secured debt with collateral

The debtor is responsible for paying child support payments and student loans, which are not discharged by bankruptcy, and debt secured by collateral such as homes and cars can be repossessed for repayment. Chapter 7 can eliminate credit card debt in many cases, and debt incurred by farmers is subject to Chapter 12.

Question 77

All states use the federal property exemptions, but states have the right to opt-out of the federal exemptions and have their residents use the state list of exemptions instead.

True or False?

Answer 77

True

There are two different sets of property exemptions, federal exemptions and state exemptions. States may decide to opt-out of using the federal exemptions and have their residents use their state exemptions instead. Other states allow their residents to choose which list works best for them.

Question 78

In bankruptcy, IRA protection is limited to an aggregate account value of $1,362,800 for which types of IRA accounts? (Select all that apply)

• SEP IRA
• Traditional IRA
• Roth IRA
• SIMPLE IRA
• IRA rollovers from qualified employer retirement plans
  The $1,362,800 exemptions on IRA accounts in bankruptcy apply only to Traditional IRAs and Roth IRAs. Therefore, SEP, SIMPLE and Rollover IRAs from qualified employer retirement plans should not be rolled over into these accounts as they have no limit on their protection.

Answer 78

• Traditional IRA
• Roth IRA

The $1,362,800 exemptions on IRA accounts in bankruptcy apply only to Traditional IRAs and Roth IRAs. Therefore, SEP, SIMPLE and Rollover IRAs from qualified employer retirement plans should not be rolled over into these accounts as they have no limit on their protection.

Question 79

Choose the type of open-end credit that is secured by your ownership in your home.

Cash-out refinance
Home equity loan
Home equity line of credit
Second mortgage

Answer 79

Home equity loan

Home equity loans come in two forms:
1. Closed-end credit, which is a home equity loan, and
2. Open-end credit, which is a home equity line of credit.
Home equity lines of credit are revolving, open-end credit lines similar to credit cards, which allow you to borrow up to a certain amount for the life of the loan.

Question 80

Which of the following laws requires lenders to disclose the cost of consumer credit, applicable charges, terms and conditions?

Fair Credit Billing Act
Equal Credit Opportunity Act
Fair Credit Reporting Reform Act
Truth in Lending Act

Answer 80

Truth in Lending Act

Passed in 1968, the Truth in Lending Act requires lenders to disclose the true cost of consumer credit, explaining all charges, terms and conditions involved.
It requires that the consumer be provided with the total finance charge and annual percentage rate on the loan.

Question 81

Which of the following would be subject to an automatic stay under Chapter 7 or Chapter 13 bankruptcy?

Criminal suits
Child support payments
Foreclosures
Alimony

Answer 81

Foreclosures

An immediate benefit of filing for bankruptcy under Chapters 7 or 13 is that an automatic stay is issued that stops creditors from attempting to collect what is owed them.
Automatic stays also stop foreclosures, property repossessions, and sales of property while repayments are made.
Automatic stays do not apply to alimony or child support payments or criminal suits.

Question 82

Identify the type of identity theft in which individuals respond to bogus email messages that resemble emails from legitimate companies, asking for updated information.

Phishing
Computer crime
Personal theft
Retail theft

Answer 82

Phishing

Phishing involves individuals responding to bogus email messages that resemble emails from legitimate companies, asking for updated information.
Phishing gives criminals access to passwords and other personal information.

Question 83

To assess a borrower’s ability to repay credit, lenders will review
I. consistency.
II. character.
III. capacity.
IV. capital.

I, II, III, and IV
III only
II and IV
II, III, and IV

Answer 83

II, III, and IV
To assess a borrower’s ability to repay, lenders often look at the three Cs of credit:
1. Character: How a borrower has handled himself or herself in previous financial dealings.
2. Capacity: Refers to ability to repay debt out of your future income. Here, the lender looks not only at the amount of such income but also at future commitments that might cause restrictions.
3. Capital: Refers to financial strength, usually measured by net worth.

Question 84

Which credit agreement requires a separate retail installment contract for each purchase and are usually used for large amounts and longer periods of time?

Open-end account
Closed-end account
Revolving account
A regular account

Answer 84

Closed-end account

A credit agreement covering a single purchase with a set repayment schedule is a closed-end account.
A closed-end account requires a separate retail installment contract for each purchase. These accounts are usually for large amounts and longer periods of time.

Question 85

A 30-year mortgage at 3.25% rate would be categorized as a
I. Balloon Loan
II. Unsecured Loan
III. Secured Loan
IV. Fixed-rate Loan

I and III
IV only
I and II
III and IV

Answer 85

III and IV

The mortgage would be categorized as a secured loan (the house serves as collateral) and a fixed-rate loan (3.25% for 30-years).

Question 86

According to the Tax Cuts and Jobs Act of 2017 (TCJA), deductibility of interest paid on home equity loans or HELOCs is suspended from 2018 to 2026 unless the loans are used to cover which of the following costs?
I. Acquisition
II. Construction
III. Substantial improvements
IV. Reduction of personal loan balances

III only
I, II, III, and IV
I only
I, II, and III

Answer 86

I, II, and III

In the past interest paid on home equity loans was typically deductible, but The Tax Cuts and Jobs Act of 2017 (TCJA), suspends the deduction from 2018 until 2026 for interest paid on home equity loans and lines of credit, unless they are used to buy, build, or substantially improve the taxpayer’s home that secures the loan.

Question 87

A long-term debt coverage ratio below ____ is not financially desirable.

1.5
2.0
1.0
2.5

Answer 87

2.5

The long-term debt ratio relates the amount of funds available for debt repayment to the size of the debt payments.
A long-term debt coverage ratio below 2.5 is not financially desirable.

Question 88

Which of the following types of bankruptcy requires the debtor and an attorney draw up a repayment plan based on the debtor’s income, which includes wages, benefit payments and rental income?

Answer 88

Chapter 13

Question 89

Select the interest rate that banks charge to their most creditworthy customers.

Fixed rate
Fed Funds rate
Prime rate
Discount rate

Answer 89

Prime rate

The prime rate is the interest rate banks charge to their most creditworthy customers.
Most consumer loans are set above the prime rate or the Treasury bill rate.