Free AFC Credit and Debt Management Questions and Answers — Questions and Answers
Question 1: A client with a steady income wants to protect their home from foreclosure and catch up on missed mortgage payments. They have significant unsecured debt but also valuable assets they wish to keep. Which form of bankruptcy would an AFC® most likely explain as a potential option for this client?
- Chapter 11 Bankruptcy
- Chapter 7 Bankruptcy
- Chapter 13 Bankruptcy (Correct answer)
- Chapter 12 Bankruptcy
Correct answer: Chapter 13 Bankruptcy
Chapter 13 bankruptcy is designed for individuals with regular income who want to create a plan to repay all or part of their debts over three to five years. It allows debtors to keep valuable assets, like a house, and provides a way to catch up on missed mortgage payments to stop foreclosure.
Question 2: Under the Fair Credit Reporting Act (FCRA), a consumer has the right to dispute inaccurate information on their credit report. Once a dispute is filed with a consumer reporting agency, what is the agency's primary responsibility?
- To immediately remove the disputed item from the report.
- To contact the consumer's other creditors to verify the dispute.
- To charge the consumer a fee to launch a formal inquiry.
- To conduct a reasonable investigation of the disputed information. (Correct answer)
Correct answer: To conduct a reasonable investigation of the disputed information.
The FCRA requires consumer reporting agencies to investigate consumer disputes regarding the accuracy of information in their reports, unless the dispute is considered frivolous. They must conduct a reasonable investigation, typically within 30 days, and correct or delete any information found to be inaccurate, incomplete, or unverifiable.
Question 3: A financial counselor is helping a client choose a debt repayment strategy. The client feels overwhelmed and needs to see progress quickly to stay motivated. Which of the following methods would be most appropriate to recommend for this client's psychological needs?
- Debt Avalanche Method
- Debt Snowball Method (Correct answer)
- Debt Consolidation Loan
- Debt Settlement Program
Correct answer: Debt Snowball Method
The Debt Snowball method focuses on paying off the smallest debts first, regardless of interest rates. This approach provides psychological 'wins' as balances are eliminated quickly, which can build momentum and keep a person motivated to continue paying off their debt.
Question 4: A client is applying for a mortgage. The lender calculates their front-end debt-to-income (DTI) ratio. Which of the following costs is included in the front-end DTI calculation?
- Monthly student loan payment
- Total credit card minimum payments
- Proposed principal, interest, taxes, and insurance (PITI) (Correct answer)
- Monthly car loan payment
Correct answer: Proposed principal, interest, taxes, and insurance (PITI)
The front-end DTI ratio, also known as the housing ratio, specifically compares the borrower's proposed monthly housing expenses (Principal, Interest, Taxes, and Insurance - PITI) to their gross monthly income. Other debts like car loans, student loans, and credit cards are included in the back-end DTI ratio.
Question 5: Which of the following is a key feature of Chapter 7 bankruptcy, also known as liquidation bankruptcy?
- It involves a 3-to-5 year court-approved repayment plan.
- It allows for the sale of non-exempt assets to pay back creditors. (Correct answer)
- It is primarily designed for family farmers and fishermen.
- It protects all of the debtor's assets from being sold.
Correct answer: It allows for the sale of non-exempt assets to pay back creditors.
Chapter 7 bankruptcy involves the liquidation (sale) of a debtor's non-exempt assets by a trustee. The proceeds from the sale are then distributed to creditors. This is different from Chapter 13, which is a reorganization with a repayment plan.
Question 6: A client wants to implement the Debt Avalanche strategy to pay off their various debts. To do this correctly, how should the client prioritize their extra payments?
- From the newest debt to the oldest debt.
- From the debt with the lowest balance to the highest balance.
- From the debt with the highest interest rate to the lowest. (Correct answer)
- From the debt with the largest balance to the smallest balance.
Correct answer: From the debt with the highest interest rate to the lowest.
The Debt Avalanche method prioritizes paying off debts with the highest interest rates first, while making minimum payments on all other debts. This approach saves the most money on interest over time compared to other strategies.
Free AFC Credit and Debt Management Questions and Answers
A client with a steady income wants to protect their home from foreclosure and catch up on missed mortgage payments.
They have significant unsecured debt but also valuable assets they wish to keep.
Which form of bankruptcy would an AFC® most likely explain as a potential option for this client?