Debt-to-Income Ratio & Bankruptcy

By Daniel Gruttadaro
Credit cards are a common source of debt for consumers

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Debt-to-income ratio and bankruptcy are linked in several ways. First, having a high debt-to-income ratio can be a cause of bankruptcy. As debt and interest piles up if a consumer cannot increase his income, bankruptcy may become inevitable. Bankruptcy might also result when a debtor loses his income source through personal injury, illness or lay offs. Debt-to-income ratio and bankruptcy both affect a person's overall credit worthiness in the eyes of lenders.

Debt to Income Ratio as a Cause of Bankruptcy

Knowing your debt-to-income ratio is important when examining your overall financial standing. There are many calculators available online that can allow you to calculate this vital ratio, including the U.S. news calculator in the resources section of this article. A good target debt-to-income ratio is 30 percent which is a number that many lenders consider a good ratio making you a low risk customer.

Affect of Bankruptcy on Debt to Income Ratio

Your debt-to-income ratio can usually be improved by increasing income, such as taking on a second job or having a stay-at-home spouse take on a part-time job. Other ways to improve your debt-to-income ratio include paying down debt. If it comes down to filing for bankruptcy, this will also improve your debt-to-income ratio because your debts will be discharged but the bankruptcy itself will have a negative impact on your credit score.

Affect of Bankruptcy on Credit Rating

A bankruptcy stays on your credit report for as long as 10 years. Lenders who see this on your credit report might justifiably be afraid that you will either file bankruptcy again in the future or run into financial difficulties. However, it is possible to rebuild your credit score after a bankruptcy.

Affect of Debt to Income Ratio on Ability to Borrow

Debt-to-income ratio is considered to be at least as important as your FICO credit score. This is because debtors know that if you have a lot of income and little debt you will have an easier time paying them back. Conversely with little income and a lot of debt you will have a hard time no matter how responsible you are. The old saying "you can't get blood from a rock" has a lot of truth to it, if a debtor is broke the creditor is out of luck.

Considerations

Keeping finances in order can be challenging when life throws obstacles in your path. It is important to arm yourself with knowledge and remember there is always a path to getting back on your feet. Debt-to-income ratio is something you can work to control. The power of bankruptcy to discharge debts can greatly improve your debt-to-income ratio when all else fails.

About the Author

Daniel Gruttadaro began writing professionally in 2009. His work appears on Web sites including eHow and Answerbag. Gruttadaro is a licensed attorney in New York. He holds a Juris Doctor from the State University of New York at Buffalo School of Law.

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