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Debt service ratios explained

On Behalf of | Jul 19, 2022 | Personal Bankruptcy

The bankruptcy courts provide ways for persons struggling with excessive debt to reverse their situation. A payment plan or a means-tested liquidation process could set a course for becoming debt free. Without massive debts, an individual may reestablish a more financially secure life. Michigan filers might be unfamiliar with bankruptcy and specific terms associated with the process. Becoming familiar with debt service ratios may help a debtor better understand how bankruptcy works.

Examining debt service ratios

Bankruptcy filers might have questions about the two forms of debt service ratios. The first one, the gross debt service ratio, looks at housing costs compared to pretax income. The costs include such things as mortgage payments and property taxes.

The other ratio is the total debt service ratio, which adds other debts to the gross debt service ratio. Such debts may entail auto loans and alimony, among other obligations.

Knowing one’s debt service ratios may be helpful when unsure about filing for bankruptcy. Paying off the debt could become extremely difficult if the ratio becomes too high. In such scenarios, debtors may consider seeking bankruptcy protection.

Filing for bankruptcy

Anyone struggling financially may wonder if personal bankruptcy represents the proper remedy for the situation. Each case is different, but those unable to come out from under their obligations may find it more costly and stressful to maintain the same troubling issues each year. With personal bankruptcy, a debtor could follow legal solutions that may benefit them and the creditors. Yes, creditors would receive some compensation under the Chapter 13 debt repayment plan. Certain debts could be subject to discharge, though.

Credit counseling may help those entering into bankruptcy. Knowing how to manage one’s credit better and financial situation could keep ratios down after leaving bankruptcy and starting over.