Are You Headed for Bankruptcy?
As a society, we love to spend money. We like our houses big and stuffed with the latest features, our cars fast and luxurious and our closets bursting with designer clothes and shoes. What we don’t like is coming to the realization that all of our purchases cost a lot and most of it wasn’t paid for with our income.
As of 2012, the average household income is $51,000 while the average credit card debt is over $15,000. Not to mention, most Americans don’t own their home outright, have long-term loans on their vehicles and are looking for more ways to borrow money to support their lifestyles. In the last 10 years, jobs have been harder to come by and don’t pay very much. Yet, we continue to spend money while trying to keep up with our friends, neighbors and the latest home renovation show on cable TV. So, what does all of this lead to? For a lot of people, it’s lead to bankruptcy.
In 2013, according to the US Courts, over 1 million bankruptcies were filed by individuals. What this means is we’ve become a country who’s fallen in love with spending money that isn’t ours. We’re bombarded with credit card offers, new car commercials dominate primetime television and mortgage company seemingly offer home loans to everyone. If you feel that you might be on the brink of filing bankruptcy, check out these two crucial signs that could mean that bankruptcy is inevitable.
Over the last five years, a lot of banks and credit unions have started offering debt consolidation loans. All of a sudden, you have the ability to roll your credit card and unsecured debt into one big, unsecured loan. For a lot of people, the upside was big as they obtained a lower interest rate and monthly payment and the payoff time was shorter. However, many of those same people couldn’t control their spending habits and eventually ran their credit card debt back up which led to an even bigger pile of debt.
In order to assess you’re likelihood of filing for bankruptcy, you need to bring out the calculator. First, total how much unsecured debt you’ve accumulated. Include all credit card debt and any loans that aren’t attached to your home or cars. Then, take that number and divide it into your annual income. The total should be below 25%. If you’re above this mark, it shows that your income won’t be able to support that level of debt for long and it may lead to bankruptcy.
When you apply for a loan, almost every bank, credit union and finance company calculate a debt-to-income (DTI) ratio for you. In order for them to approve your loan, your ratio must be below a certain mark. Over the years, the acceptable ratio has increased so banks can approve more loans. Not that long ago, the acceptable ratio was around 35%. However, the ratio has increased more and more and is now all the way up to 50% for some companies. This trend has led to a lot of people obtaining cars and houses that were really out of their price range.
Just like your Body Mass Index (BMI) tells you how healthy or unhealthy you are, your DTI can often tell you your financial health. So, what exactly is a debt-to-income ratio? The formula is actually rather simple. You just take all of your minimum payments of items that are listed on your credit report (auto payments, mortgage payment, credit card bills, etc.) and divide the total into your gross monthly income. Just like with your BMI, the lower the number, the better. In most cases, if your DTI is at or above 40%, it means you’re going to have a hard time paying your bills each month and you’ll likely accrue more debt just to keep up with everything.
If you find that you might be headed for bankruptcy, you have a few options. You first need to figure out if bankruptcy is the only way out. For some people, they can cut monthly expenses like eating out or cable TV. You can also look at selling a vehicle to eliminate a high monthly payment or even refinancing an auto or mortgage loan to lower those payments. You can then throw that saved money at your debt.
Depending on your financial situation, just cutting a few luxury items out of your monthly expenses might not help you avoid bankruptcy. If that’s the case for you, your next step is checking into bankruptcy.
No matter where you live, a quick Internet search will turn up seemingly countless bankruptcy lawyers in your area. Most lawyers will offer a free consultation. You can fill them in on your current situation and they’ll give you all the steps on what it’ll take to officially file for bankruptcy and if it’s the right move for you.
For most people, it’s truly not their fault for accruing large levels of debt. Banks and finance companies have changed their approval policies and have given people loans they probably shouldn’t have qualified for. Plus, society often says that having debt is just a way of life and it’s alright to have a lot of it. However, we don’t usually hear about the crippling affects debt has on people. So, take a little time and run a few easy calculations to see how healthy your finances truly are.
About Jonathan Hubbs I'm Jonathan Hubbs and I have over a decade's worth of experience in banking and the financial field. When I'm not writing about money, I'm spending time with my wife and two daughters, who definitely know how to spend my money!