Reference no: EM132853826

Case Study 1: Lucy Wants to Buy a House but Doesn't Want a Roommate Now

Questions:

Lucy Allen has save $10,000 toward a $20,000 down payment on buying a home. She puts aside $300 a month in her house fund and is currently renting a one-bedroom apartment on her own for $1,300 a month. If she rented a two-bedroom apartment with a roommate, she could reduce her rent to $900 a month. While having a roommate is not Lucy's favourite solution, she'd be able to build up her down payment for buying a house a lot faster if she were able to save an extra $400 a month. If Lucy stays on her own and her finances remain the same, it will take her about 2 ¾ years to put aside the needed additional $10,000. In contrast, if she set aside the rent saved by getting a roommate, she would have the needed $10,000 in about only 14 months. Doing without a roommate at this stage in Lucy's life is costly.

1. If you are in the situation of Lucy would you continue renting for a one-bedroom apartment or settle for a two-bedroom apartment with a roommate?

2. On the given situation, what's the best thing Lucy should do?

Case Study 2: Ryan Has Had It and Files for Bankruptcy

Ryan Booth is overwhelmed by his bills. While making $60,000 a year, he has amassed credit card debt of $24,000, has an over $80,000 college loan, holds a $150,000 mortgage, and pays monthly on his leased Jetta. He's having trouble paying the mortgage monthly and can never seem to pay more than the minimum on his credit card debt. Ryan's wife, Helen, is currently unemployed. Ryan has heard that declaring bankruptcy can eliminate some of his debt commitments and give him extra time to deal with others. He's had it and just filed for bankruptcy. What can Ryan look forward to as a result of his decision?

Ryan can expect some cash flow relief in the short-term, and filing for bankruptcy will likely prevent or at least delay foreclosure on his home. However, the bankruptcy filing will adversely affect his credit report for up to the next 10 years. Ryan will probably have trouble getting a loan or a new credit card. And if he can borrow money or get a new credit card, he'll probably have to pay the highest allowable interest rate. By not having managing his family's indebtedness, Ryan has exercised the bankruptcy "nuclear option." This provides short-term relief at the expense of longer-term access to credit on reasonable terms.

Questions:

1. Do you think filing bankruptcy will be the best solution for Ryan's financial crisis? Support your answer.

2. Discuss all the advantages and disadvantages of filing personal bankruptcy.