Revealed: The Formula for Determining Whether You Should File for Bankruptcy

06 Nov Revealed: The Formula for Determining Whether You Should File for Bankruptcy

Everyoneseems to haveheard of a simple “formula” for determining when you should consider filing a chapter 7 or chapter 13 bankruptcy. The problem is that once you start looking for the formula, it becomes apparent that there are numerous versions, and none of them seem to agree with one another.

Many seem to think that it’s the sheer total of allyour debts that indicates you are a candidate for bankruptcy — but that can’t be right, can it? If you have a $200,000 mortgage and can handle the payments, that’s a far cry from having $200,000 in credit card debt and not being able to handle the payments.

Or how about the one about your debt-to-income ratio — will that tell you whether you should be considering bankruptcy? Probably not. Many persons’ debts total three or four times their annual income,yet they can handle the payments without much trouble, depending on the type of debts and the interest rates the debts carry.

Maybe the total of your monthly debt payments compared to your net monthly income? How about that one? For example, what if your monthly debt payments total more than half your monthly income? This formula at least makes some sense, but once again, it’s only a rule of thumb. It would easy formany persons living alone to make debt payments totaling half their monthly income, while the breadwinner of an eight person household might find it impossible to pay that much income toward debt payments.

By now, you are probably beginning to see where the answer lies. The “formula” for helping decide whether you should consider bankruptcy is complicated.In fact, calling ita formula might even be a stretch. Instead,we might just call itan old fashioned mathematical excercise involving a sheet of paper, a calculator and your pile of monthly bills.

Here’s what you should focus on: finding out how much net monthlyincome you typically bring into yourhousehold; totalling up the monthly payments on your debts (but excluding your rent or mortgage and your car payment); and adding all of your necessary monthly living expenses, such as rent or mortgage, car payment, groceries, utilities, and the like.

The formula for determing whether you are candidate for bankruptcy goes like this: if your net monthly income, minus the monthly payments on your debts, leaves you without enough money to pay for your necessary monthly living expenses, then your monthly household budget is broken. This means you need totake action to fix your broken budget.

Such action could include getting a second job to increase your income, or cutting back on living expenses which you decide, after giving it some thought, you can live without. However, you should consider bankruptcy as an option when there is no reasonable way for you to either increase income or reduce living expenses.

While filing chapter 7 or chapter 13 bankruptcy will usually have no effect on your monthly living expenses, bankruptcy will eliminate most of your unsecured debts, takingyour monthly payments on debts away from you. Without the need for you to make overwhelmingly large monthly payments on old debts, you can plug your monthly income and expenses figuresinto the above formula — and the result will show you whether, and how much, filing bankruptcy can help you.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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