Debt to Income to Bankruptcy

Image courtesy of  Albertoog  (Flickr).

Image courtesy of Albertoog (Flickr).

Debt to income ratio is an important component of your financial health.

While there is some debate as to how much this ratio actually impacts your credit score, there is no question that it can determine your credit worthiness.

Lenders will use this ratio as a factor to determine whether you are eligible for credit and if so, how much.

This article will not get academic.  I am not here to educate you on debt/income ratio.  With that said, I do think it is important to understand this concept for your personal financial well being.

For education purposes, I point you to Credit Karma’s discussion on debt to income ratio.

I’m a bankruptcy lawyer and therefore, I see everything and analyze everything from that perspective.

Debt to income ratio can and should influence your decision to file bankruptcy.

Post Bankruptcy Debt to Income Boom

A quick consultation with Doctor Google will provide an infinite number of pro/con lists related to filing bankruptcy.  Some are quite accurate and informative and others are junk.

One of the rarely mentioned pros to filing bankruptcy is the immediate “boost” to your debt to income ratio.

Regardless of who you are or how much you earn, if you have eliminated or reduced your debt through the bankruptcy process, your debt to income ratio has immediately improved.

This immediate improvement can offset the short term damage to your credit as a result of the bankruptcy filing.

Common sense tells us that if you have no debt now, you are less of a credit risk than you were in the past.  Credit scores can be completely arbitrary and not tell the entire story about someone’s ability to pay back their debt.  

Pre Bankruptcy Debt to Income Factor

A while back I consulted with a client who was considering chapter 7 bankruptcy.  She was reluctant to file based on the fact that she only had $7,000 in unsecured debt.

She had a legitimate concern, however I still recommended that she file chapter 7 bankruptcy, discharge her debt and get a fresh start.

While she only owed $7,000 in unsecured debt, at the time she was only earning $200 per week at a part time job.  On top of that, she was 7 months pregnant with no possibility of earning substantial income for the foreseeable future.

She was no better off than someone earning $30,000 per year with $30,000 in debt.

I have met with many clients who were initially reluctant to contact a bankruptcy attorney thinking that there was a minimum amount of debt you had to have in order to qualify.

This is just another wild misconception that has probably left many a consumer struggling with their monthly bills.

I strongly urge you to consider your debt to income ratio when making the decision to file bankruptcy.  It is an important pre-filing factor and can be a post discharge benefit.