Iycee Charles de Gaulle Summary Overspending Leads to Bankruptcy Essay

Overspending Leads to Bankruptcy Essay

Overspending Leads to Bankruptcy Rebecca Wilcox BLA 303 ABSTRACT: Never before in history has there been so many different things to buy, or so many places to buy them from. We are constantly bombarded everywhere with messages telling us that we need to have the latest products being touted. All around us are constant opportunities to purchase every kind of bauble, gadget, or toy. In spite of a slumping economy, American people are still shopping with a fervent passion. In recent times, chronic overspending has become a major problem in our society.

The growth of capitalism has created a huge demand for goods and services. It is estimated that about ten percent of the American population has compulsive buying habits. A lot of people are finding themselves without any kind of a savings, or worse, in debt over their head. Not only does this impact our individual lives, but it affects our businesses as well. Many businesses go under because of a lack of precaution and poor money management. Overspending can lead to personal bankruptcy and business bankruptcy.

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INTRODUCTION: Bankruptcy is a last resort financial maneuver activated by those individuals or businesses that face insurmountable debts as a result of overspending or faulty business ventures. Bankruptcy is a federal program, which offers an individual or business entity alleviation from all debts obtained, both secured and unsecured. A bankruptcy filing offers relief to those in debt, through either liquidation or restructuring. Liquidation refers to the selling of the underlying debtor’s assets.

When these assets are sold the proceeds are used to fulfill their debt obligations. The laws and regulations which govern bankruptcy are distributed and overheard at the federal level. A bankruptcy filing enables those struggling with debts to reorganize their debt structure by supplying incremental payments to their creditors. There are many different forms of bankruptcy filings, the most common of which being a chapter 7 filing, a Chapter 11 filing, and a Chapter 13 filing. The bankruptcy statistics in America are alarming. The past few ecades have seen a dramatic rise in the number of people who are unable to pay off their debts, and Congress has recently addressed the issue with legislation that makes it harder to qualify for this status. Bankruptcy is a major part of business law, as many companies and individuals consider filing at some point in their lives. Over-consumption, overspending and households that simply live beyond their means are the primary factors that wreck finances and lead to bankruptcy. When household budgets are stretched to the limits and beyond, a single adverse event such as an illness or layoff can immediately lead to bankruptcy.

While many bankruptcies may be triggered by these adverse events, the true cause of the bankruptcies is overspending. In recent times, chronic overspending has become a major problem in this society. The growth of capitalism has created a huge demand for goods and services. It is estimated that about ten percent of the American population has compulsive buying habits. A lot of people are finding themselves without any kind of a savings, or worse, in debt over their head. Not only does this impact individual lives, but it affects businesses as well.

Many businesses go under because of a lack of precaution and poor money management. PERSONAL BANRUPTCY: Personal bankruptcy as a result of overspending is growing rapidly. Some people simply can’t control their spending. Credit card bills, installment debt, car and other loan payments can eventually spiral out of control, until finally the borrower is unable to make even the minimum payment on each type of debt. If the borrower cannot access funds from friends or family or otherwise obtain a debt-consolidation loan, then bankruptcy is usually the inevitable alternative.

Statistics indicate that most debt-consolidation plans fail for various reasons, and usually only delay filing for most participants. Although home-equity loans can be a good remedy for unsecured debt in some cases, once it is exhausted, irresponsible borrowers can face foreclosure on their homes if they are unable to make this payment as well. More forms of overspending that can be shown to lead to bankruptcy are divorce or separation, and medical bills. Marital dissolutions create tremendous financial strain on both partners in several ways.

First come the legal fees, which can be astronomical in some cases, followed by a division of marital assets, decree of child support and/or alimony, and finally the ongoing cost of keeping up two separate households after the split. The legal costs alone are enough to force some to file, while wage garnishments to cover back child support or alimony can strip others of the ability to pay the rest of their bills. Spouses who fail to pay the support dictated in the agreement often leave the other completely destitute. Overspending on high medical bills can be shown to cause bankruptcy.

Rare or serious diseases or injuries can easily result in hundreds of thousands of dollars in medical bills – bills that can quickly wipe out savings and retirement accounts, college education funds and home equity. Once these have been exhausted, bankruptcy may be the only shelter left, regardless of whether the patient or his or her family was able to apply health coverage to a portion of the bill or not. Overspending can be caused by unexpected expenses as well. Loss of property due to theft or casualty, such as earthquakes, floods or tornadoes for which the owner is not insured can force some into bankruptcy.

Many homeowners are likely unaware that they must take out separate coverage for certain events such as earthquakes. Those who do not have coverage for this type of peril can face the loss of not only their homes but most or all of their possessions as well. Not only must they then pay to replace these items, but they must also find immediate food and shelter in the meantime. Furthermore, those who lose their wardrobes in such a catastrophe may not be able to dress appropriately for their work, which could cost them their jobs. BUSINESS BANKRUPTCY Businesses are also prone to overspending.

Financial distress is a direct result of overspending. When a company takes out a loan or uses credit to cover costs, then is unable to make enough money to pay it off, they become indebted. This is similar to a pit of quicksand for some, because the more in debt they become, the more they borrow to cover the debt. This only serves to make things worse rather than better. Businesses can spend too much on fixed assets, such as technology, land, buildings, or supplies. If a company spends too much on these before having sufficient revenue, it can lead to the company not being able to afford these.

Another cause of business overspending is the lack of a budget. In poor economic conditions, a budget is a necessity. Without a budget the chances to overspend is vastly increased. Many businesses starting up buy because they believe they have the money to cover their purchases. Often they are shocked to realize that they didn’t have nearly enough to cover the purchase as they thought. Many startups spend their seed money before cash has begun to flow in at a positive rate. This often happens because of misconception about how business operates. ETHICS: When a company files bankruptcy, they must liquidate to pay off as much debt as they can.

A trustee is appointed to liquidate the company’s assets, and the money is used to pay off debt. The investors, or creditors, who take the least risk are paid first. For example, investors who take a relatively reduced risk in the company by purchasing corporate bonds must forgo the potential of seeing any excess profits the company may earn in the future. For the higher safety of the bonds, the investors agree to receive, at most, their specified interest payments. Equity holders, however, have the full potential of seeing their share of the company’s retained earnings, which would be reflected in the stock’s price.

But the tradeoff for this possibility of boosted returns is the risk that the stock may lose value. As such, in the case of a Chapter 7 bankruptcy, equity holders may not be fully compensated for the value of their shares. In light of the risk-return tradeoff, it seems fair that shareholders are second in line to bondholders when a bankruptcy does occur. Secured creditors, who are even more risk-averse than regular bondholders, accept very low interest rates in exchange for the added safety of corporate assets being pledged against the company’s debt.

Therefore, when a company does go under, secured creditors receive priority and are paid back before any regular bondholders begin to see their share of the pie. Filing for bankruptcy does not mean that the company is no longer responsible for its debts. When a company files for Chapter 11, that company is assigned a committee that represents the interests of creditors and stockholders. This committee works with the company to develop a plan to reorganize the company and to get it out of debt, reshaping it into a profitable entity.

Shareholders may be given a vote on the plan, but as their priority is second to all creditors, this is never guaranteed. If no suitable reorganization plan can be prepared by the committee and confirmed by the courts, shareholders may not be able to stop their company’s assets from being sold off to pay creditors. An investor is greatly affected if a company faces bankruptcy. Clearly, nobody invests money into a company, whether through its stock or its debt instruments, expecting the company to declare bankruptcy.

However, when one ventures outside of the risk-free realm of government-issued securities, they are accepting this added risk. When a company is going through bankruptcy proceedings, its stocks and bonds usually continue trading, albeit at extremely low prices. Generally, a shareholder will usually see a substantial decline in the value of shares in the time leading up to the company’s bankruptcy declaration. Bonds for near bankrupt companies are usually rated as junk. When a company goes bankrupt, there is a very good chance an investor will not get back the full value of the investment.

In fact, there is a chance they won’t get anything back at all. CONCLUSION: Bankruptcy should be avoided at all costs. There are ways to control spending in order to always have more money coming in than going out. The easiest way to avoid bankruptcy is to develop a budget. Individual consumers and businesses are often forced into bankruptcy because they extend beyond their spending limits. This simple relationship occurs when an individual consumes beyond their income or savings. The budget should be created in alignment with your individual disposable income, your daily expenses, and your desired purchases.

A construction of a suitable budget will guarantee that you will not spend beyond your means, thus effectively avoiding bankruptcy. This also can and should be done for businesses. Another fundamental way to avoid bankruptcy is to sell whatever assets are not used or not needed. If you notice that your payments and loan requirements are suffocating your daily finances, you should sell off your assets that you deem meaningless. Liquidating your assets through various venues will award you cash to help pay off your debts. To avoid bankruptcy, you should also be in constant contact with your creditors.

Although creditors may institute predatory lending and collecting techniques, the majority of them is flexible and will create alternative or periodic payment plans to help alleviate your financial burden. RESOURCES: Bae, MiKyeong, Hanna, Sherman, ;amp; Lindamood, Suzanne. (n. d. ). Patterns of spending in us households. Retrieved from http://6aa7f5c4a9901a3e1a1682793cd11f5a6b732d29. gripelements. com/pdf/vol-42. pdf Cardwell, Dale. (2011). Overspending issue is like a broken record. The Marietta Daily Journal, Retrieved from http://mdjonline. com/view/full_story/14767040/article-Dale-Cardwell–Overspending-issue-is-like-a-broken-record? nstance=special%20_coverage_right_column Elder, Gerri L. (n. d. ). Overspending as a cause of bankruptcy. Retrieved from http://www. totalbankruptcy. com/news/articles/studies/overspending-equals-filing-bankruptcy-study. aspx Cheeseman, H. R. (2010). Business law: Legal environment, online commerce, business ethics, and international issues. (7th ed. , pp. 434-455). Marfleet, F. (2005, July 4). Why 9 in 10 Businesses are Overspending on Day-to-day Expenses. Retrieved from http://ezinearticles. com/? Why-9-in-10-Businesses-are-Overspending-on-Day-to-day-Expenses&id=48468