To file bankruptcy, you must be “insolvent,” a term that basically means that you can no longer pay your bills. Your debt to income ratio can help determine if you are a good candidate for bankruptcy. Testing your debt to income ratio can help you determine if you are truly “insolvent” and unable to pay off your debts.
Debt to income ratio is a term used by lenders. The focus of the debt to income ratio is on required monthly debt repayment. It calculates how much your minimum (or reasonable sized) payment per each month totals for all of your debts.
For instance, use an example where you had $700 in credit card payments, $1100 in mortgage payments, and a $300 auto loan payment. This would total $2100 per month. If you made a total of $4200 per month, then you would have a 50% debt to income ratio. This is because your debt-to-income ratio is your total monthly payments on debts divided by your gross income.
You may be a good candidate for bankruptcy relief if you have a calculated debt to income ratio that exceeds 50% . Mortgage lenders usually do not want to lend to anybody with a debt to income ratio of about 42%. Mortgage lenders have determined that defaults on debts occur much more frequently if the debt-to-income ratio exceeds this 42% range.
Using this concept, if you find yourself exceeding the 42% range, you may be running into trouble. If you have incurred large amounts of credit card, medical, or personal debts, you are even more likely a good candidate to file for bankruptcy if you exceed this 42-50% or greater range.
Beyond debt to income ratio, you can use a more simple qualifying test to see if you should file for bankruptcy. This is called the “two to three year test.” If you believe that you will be in the same bad financial shape as now after working on your debts to 2-3 years, you should get a consultation with a bankruptcy attorney. If you are only able to pay minimum payments or “just get by,” you need to make a more powerful plan for getting out of debt. You could service your debts for a decade and never get out of debt.
Remember, the best way to determine if you are good candidate for bankruptcy is to get a free consultation with a bankruptcy attorney. Bankruptcy attorneys constantly analyze debt situations. Such attorneys are uniquely equipped to answer all of your questions. They can give you frank and honest answers about the debt situation you are facing.