Understanding Your Debt-To-Income Ratio And Its Effect On Bankruptcy

Just about everyone has debt, and those with a high debt amount may think that their only choice is bankruptcy. But it may be possible to manage this situation if your debt-to-income ratio is at a reasonable level. Understanding your debt-to-income ratio and its effect is crucial for managing your financial health.

The Nature Of Debt-To-Income Ratios

Debt-to-income ratios indicate how much of your monthly income goes to your debt payments. The income represented in this ratio is your net, not gross, income. People who are in debt should strive to have a ratio of no more than 20-30 percent. Much of this ratio will be taken up by housing costs, such as mortgages, but can also consist of student loan debt and credit cards.

While a better job or a sudden inheritance can cause your debt-to-income ratio to become more favorable, it is much easier for the ratio to get worse. In some instances, an unstable debt-to-income ratio may cause a person to find that bankruptcy is their only option.

How Poor Debt-To-Income Ratios Cause Bankruptcies

Bankruptcy is a complex situation that requires understanding many aspects of your finances. For example, fully gauging your debt-to-income ratio can let you know if you have borrowed too much money in the past. Situations like this often happen when a person takes the maximum amount of money offered to them in a loan.  

A person who used credit cards to pay their way through college may also find that their debt-to-income ratio is incredibly high. Whatever the situation, it is important to know how to calculate your ratio and the way you can use it to gauge if you really do need to go into bankruptcy.

Calculating Your Ratio

Before you declare bankruptcy, it is worth knowing whether or not your debt-to-income ratio is too high. There is a very simple formula for figuring this out. Start by adding up all of your debt payments in a month. This should include every payment you make, even cable and internet bills. Next, figure out how much money you take home every month. Divide your recurring debt by this amount.

Thankfully, there is no debt-to-income ratio minimum when you declare bankruptcy. However, understanding the level of your ratio can help you decide if bankruptcy is your only option. You may be able to cut out some bills, such as the aforementioned cable and internet, to help reduce your ratio to a more manageable level.

However, if you find that you debt-to-income ratio is too high and you can't make ends meet, don't hesitate to talk to a bankruptcy lawyer right away. These professionals are skilled at helping you through the difficulties associated with this process.