FINANCIAL TROUBLES AND RESOLVING OPTIONS

FINANCIAL TROUBLES AND RESOLVING OPTIONS

Is the Bankruptcy an exclusive solution?

By Henry Orozco

The present glossary is a guide of a process, and it is not formal or legal advice. It is looking for help someone to assume the best position against a hardship and its possible solutions. This is a previous look before a legal counseling meeting, but let you to take the necessary steps to be ready at the first meeting with your lawyer and it will save time, extra stress and money. You legal counselor will be pleasant with this initial planning, and potentially may reduce his/her honoraries for that extra help you provide. The timeline organized documents is the key to overcome. Every case of bankruptcy is different because the facts and antecedents involved, but the process becomes similar and most cases identical at the final results. Fallowing you can a detailed steps and its consequence outcome for chapter 7 of bankruptcy.

Initial plan

The first step you must to take is to check-up your financial position. Most the times we are wrong to determinate a financial difficulty as a concluding to declare in bankruptcy. The family budget can avoid this unnecessary stress and keep an appropriate balance between expenses and income. To measure this you can calculate the debt-to-income ratio (DTI). If the potential creditor used this ratio to determinate the high/low risk customer. You can use it to know how risk you are to face-up a financial downturn. There are two type of DTI. The first is front end ratio or housing ratio. This gives you the portion of the income used to pay the housing (Rent or mortgage) and it is using for the lender to determinate if the potential debtor (you) can effort the payments. The maximum allowed is 31%.

Total monthly debts (Mortgage payment including taxes, insurance and interest)

Debt-to-income ratio = -------------------------------------------------------------------------------------------------------

(Front end ratio) Total monthly income

The second is back end ratio or overall DTI. The creditors use this ratio to measure your capacity to pay off your debts, and become a very important tool in bankruptcy cases.

Total monthly debts (mortgage, credit cards, other credits and fixed obligations**)

Debit-to-income ratio=--------------------------------------------------------------------------------------------------------

(Back end ratio) Total monthly income

**(Minimum credit card scheduled payments, other unsecured debts such store credits, students loans, car loans, child support, alimony and personal loans). The allowed ratio varies in all states. In New Jersey the most common ratios used are:

• 36% or less: Good to acceptable with a low risk of default credit

• 37% to 42%: Some adjustment are necessary to take (lower debts/increase income)

• 43% to 49%: Warning, you may have something out of control in your expenditures

• 50% an up: You have to seek for a credit counselor and take control of your debts

Your risk will be more evident with higher ratios, and some adjustments will precede such reduction the unnecessary expenses, increase the income, or both. A closely look to your monthly budget can helps to determinate overestimates and underestimates expenses. Reducing income and increase expenses is the most common situation especially when a family member is going to college and the financial aids are not available. Avoid the Bankruptcy is the first goal. If you find no solution to cover those debts, the planning to success your application becomes essentially necessary. The next list of documents you have to be ready to send, and keep for future references in your particular case.

• Income and expenses statements : this should be comparative for the last six months and supported with all concerned documents

• Income-tax returns for the last two years

• Pay stubs and other proof of income received

• Bank accounts statements (checking and savings) for the last six months

• Mortgages statements for the last six months include any refinancing

Initial test

Chapter 7 becomes the more useful tool to cancel some unsecured debts such credit cards. An initial test becomes necessary in order to know if you qualify. The first think is to analyze the last six months of income, use of credits and fluctuation of fixed/variable expenses. This initial counseling session is not an option; this is the first step to follow. If the test goes out of scope from the chapter 7 limits, it drives you to the option of chapter 13. This means a repayment plan for 3 to 5 years

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