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Consumer bankruptcy filing may be indicated by certain formulas

For consumer borrowers in Pennsylvania, a calculation called the debt-to-income ratio is sometimes helpful in determining whether the consumer can pull out of the debt situation without filing bankruptcy. A debt-to-income ratio of 20 percent is considered low by the government and, as such, would be ideal for government lending. Any percentage over 40 percent is considered financially stressful and could lead to a recommendation of filing bankruptcy.

The calculation is also used by private lenders when deciding whether to grant a loan. It simply makes common sense that the more debt that a person has in comparison to his or her income, the more of a struggle the person will have in paying the debt. In addition, credit reporting agencies are likely to downgrade the credit score of one who has a high debt-to-income ratio. Personal loan companies are called upon to issue loans for consolidation and payment of credit card debt.

In that capacity, they may issue loans to those who have over 50 percent debt-to-income ratios. However, it's a risky loan and may lead eventually to an overload that demands a bankruptcy filing. A credit utilization ratio is another calculation that examines whether the consumer is having financial stress. It provides the amount of credit available as compared to one's credit limit. It is a vital formula in determining credit scores in Pennsylvania and nationwide.

It is far better to owe a small percentage of one's credit limit than to be already extended up to the ceiling. Obviously, a lender is going to see potential payment stresses when one already is hitting the limit with other accounts. One should not exceed 30 percent of the credit limit. In conclusion, when a Pennsylvania consumer borrower has a debt-to-income ratio that is over 50 percent, filing a bankruptcy will usually be the most reasonable alternative under the circumstances.

Source: nerdwallet.com, "Calculate Your Debt-to-Income Ratio", Aug. 3, 2016

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