Many people have been struggling financially during 2020 because of the countless destructive economic impacts of the coronavirus pandemic. Even those with a stable income may be finding it difficult to meet debt payments each month.
If your finances are out of balance, no matter the cause, you always have the option to file for bankruptcy and receive long-term debt relief. At Behm Law Group, Ltd. we help clients work through reorganization chapter 13 or liquidation chapter 7 bankruptcy in Windom, MN, offering legal protection and guidance from start to finish.
One of the aspects of your finances that’s considered for any type of bankruptcy, but especially for liquidation bankruptcy (Chapter 7), is your income-to-debt ratio. This ratio measures your net surplus income after all debts are paid, and the ratio is a percentage of that value. For example, if your income is $35,000 before taxes and other deductions are removed and your total annual debt amount is $14,000, your income-to-debt ratio is 40%. When mortgage lenders or landlords take a look at your finances to see if you are eligible for a contract or loan, they typically measure your income-to-debt ratio on a monthly basis. For most lenders, a minimum income-to-debt ratio allowance is 43%.
When it comes to Chapter 7 liquidation bankruptcy, the income-to-debt ratio determines if a filer is eligible for that process. Chapter 7 bankruptcy works to discharge debts in exchange for the liquidation or sale of non-exempt assets. In most cases, the bankruptcy code exemptions allowing one to protect one’s property are more than adequate to protect all of a person’s property from liquidation, however. To prevent abuse of this system, filers are required to pass a legal mathematical threshold called the Means Test.
The Means Test asks a series of questions and requests the submission of some financial documents. It essentially determines your income-to-debt ratio and decides whether that ratio is below or above the state median or average income for a household of a similar size. If your income-to-debt ratio is lower than the state median or average, you qualify for chapter 7 bankruptcy.
The reason your income-to-debt ratio is considered rather than just your gross monthly income is because the debt load of each household can vary so greatly. You might have a low income but very little debt, and that combination could be a deterrence for filing Chapter 7. Likewise, a very high-income household might also have very high debt that renders an income-debt-ratio that is appropriate for the filing of a chapter 7 bankruptcy.
Income-to-debt ratio is also used to calculate certain aspects of your repayment plan in a Chapter 13 case if you’re ineligible for Chapter 7 or if you simply don’t wish to file chapter 7. Mainly, this ratio helps determine how much you will pay to the trustee every month for distribution among your creditors during your Chapter 13 repayment plan period.
If you are considering filing for bankruptcy or would like to learn more about chapter 7 bankruptcy in Windom, MN, contact Behm Law Group, Ltd. today at (507) 387-7200 or stephen@mankatobankruptcy.com.
