Your Debt to Income Ratio

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

While there is some disagreement as to how much this ratio actually impacts your credit score, there is no doubt that it impacts your credit worthiness.

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

The purpose of this article is not to educate you on debt to income ratio, however I do think it is extremely important to understand this concept for your personal financial health.

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 through my bankruptcy tinted lenses.

This past week I was reminded how your debt to income ratio influences your decision to file bankruptcy and how it changes post bankruptcy.

Post Bankruptcy Debt to Income Boom

There are an infinite number of pro/con lists online related to bankruptcy.  Some are quite accurate and informative and others are trash.

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

I don’t care who you are or what your income is, 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.

Pre Bankruptcy Debt to Income Factor

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

She is 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.

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.

Image courtesy of Thomas8047 (Flickr).

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