FINANCIAL LITERACY CASE STUDY (The Case of Bob's Financial Pitfalls) NGPF Case Study Financial Pitfalls Spanish version Case Study Summary Description:

In this Case Study, students will take on the role of a credit counselor to assist a borrower who finds himself in serious financial distress. Several options will be presented, and students will identify pros and cons of each approach and choose a path forward. The report requires: Internet Usage: Yes Use of Financial Concepts: Yes Use of Financial Statements: Yes Alignment to Managing Credit and Financial Pitfalls Learning Objectives: Students will be able to Explain how to make good choices regarding the use and management of credit and debt Generate a list of responsible strategies that can be used by an individual to pay down and eliminate their debts Decide whether credit counseling, the FTC, or the CFPB could help them manage debt Understand the consequences for not paying one's debts and the choices of last resort for out-of-control debt Explain how using [types of predatory loans] can cause a vicious cycle of debt Identify the various costs associated with bankruptcy List what steps you can take to avoid filing for bankruptcy, including seeing a credit counselor Get Me Out of My Debt Dungeon! Juanita, a credit counselor, stared outside her office and saw the darkening sky, as a winter storm approached. Her next client, Bill, faced his own financial storm with debts mounting and no clear solution in sight. Juanita hunkered down to review his thick file, knowing that Bill would soon arrive looking for answers to his financial predicament. Juanita reviewed her notes summarizing Bill's current situation: Recent college graduate earning $36,000 as a salesperson at a local technology company. Base salary of $24,000 and $12,000 earned in commissions in the past year. His company has been struggling recently, and he is worried about potential layoffs. His three largest monthly expenses: o Rent: He rents a one-bedroom apartment in a "hip" part of the city for $1,200 per month. His lease is up next month, and he needs to let the landlord know if he wants to stay there. He pays his rent on-time every month. His parents, who live in the same city, have always offered him his old bedroom if he wants to move back in but would expect him to pay "some" rent. o Food: He loves dining out 2-3 times per week at nice restaurants with friends and spends about $500 per month on food using his debit card. o Entertainment: Concerts, sporting events, movies; Bill vowed that he would enjoy the city life and clearly has by spending about $500/month to entertain himself and friends. When Bill arrived for their meeting, Juanita thought a great starting point for their discussion would be to discuss his spending habits. Juanita's experience as a credit counselor had taught her that you couldn't treat the symptom (high debt levels) without addressing the cause (spending more than you take in) first. While Bill was anxious to talk about solutions first, Juanita pulled out a worksheet they worked through together. Finally, Bill got very animated discussing how his friend's recent bankruptcy filing enabled her to walk away from her debts: "It was hard for me to believe what she was telling me. She had similar debts to me, including credit card, federal student loans and a car loan, and they all got wiped out. Just like that! She gets to keep driving her car and doesn't have to make any more payments. The crazy thing is that a week later, she got a credit card offer in the mail too, so she will be able to start borrowing again. Oh, and it didn't cost her anything to accomplish all this. Amazing! This seems like a great route to go, too. Am I missing something?"

Answer this: 10. What should Juanita tell Bill that he is missing? With only ten minutes left in their session, Bill wondered aloud about his best option to get out of his debt dungeon: "Well, Juanita, we have talked about a lot of different options in the last fifty minutes: debt consolidation, consumer credit counseling and bankruptcy. I appreciate you helping me sort out my budget as well as the debt payments that I need to make on a monthly basis too. All very helpful stuff but I am still having trouble sorting all this out. It seems that I could go in a lot of different directions, and all the options seem like good ones. What would you recommend?"

Answer this: 11. Using all of the information provided in this case, as well as your previous knowledge, develop a plan for Bill to tackle his debt demons. Be sure that your plan is very specific and includes the following: Recommended changes to his budget and how they will impact his ability to pay down his debt (i.e. how much more money will you free up to make his monthly payments) Total monthly payments currently required to service his debt Discussion of pros/cons of the three alternatives (a chart would be useful) Reason that a particular course of action was selected.