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Considering bankruptcy? Use the 'divide by 60' test

It's a rule of thumb to see whether you should file

By Todd Ossenfort

The Credit Guy
'The Credit Guy,' columnist Todd Ossenfort
The Credit Guy, Todd Ossenfort, is a credit expert and answers readers' questions about credit, counseling and debt issues.

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Question for the CreditCards.com expert

Dear Credit Guy,
Is trying to work with a credit person to help you get out of debt a good thing or is just filing for bankruptcy the best action to take when you are in over your head? -- Garry

Answer for the CreditCards.com expert

Dear Garry,
Filing bankruptcy when you have other alternatives available that would work for you is like having major surgery to remove a splinter from your finger that could easily have been removed with tweezers. Taking on the risks, costs and long-term effects of bankruptcy or surgery when not needed don't make sense.

However, bankruptcy is a viable and recommended strategy for those persons with debt loads and incomes that don't match up or who, in other words, could never repay what is owed within a reasonable amount of time. To determine whether or not you would be a candidate for bankruptcy, do some simple math.

Take the balance of the unsecured debt (credit card accounts, medical bills, personal loans, etc.) that you owe and divide by 60. If the amount that you get is more that you could comfortably pay on a bare bones budget, then you may be a candidate for bankruptcy. For example, if you owe $25,000 in unsecured debt, you would need to be able to comfortably pay approximately $420 per month in order to avoid bankruptcy.

When I say comfortably pay that means you would be able to pay your housing and reasonable transportation costs (you might have to get by with one vehicle for awhile) along with utilities, insurance and food (eating in and clipping coupons) and your unsecured debt payment with perhaps $25 a week or so to put aside in a savings account. Comfortably is a relative term here. A better way to get my point across may be with the following example.

Write down all your monthly expenses minus your unsecured debt. Trim any unnecessary expenses such as meals out, entertainment expenses, anything other than required clothing, you get the idea. Once you have that monthly figure, then add your unsecured debt figure once you have divided it by 60. If you have enough income to cover all those monthly expenses, then you would most likely be better served paying off your debt rather than filing bankruptcy.

Keep in mind that to qualify for Chapter 7 bankruptcy where your debts are satisfied with the sale of your nonexempt property after the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the income requirements are now no more than the median income for your state to qualify without a means test. If you do not pass the means test, your case will be converted to a Chapter 13 where at least of portion of the debt is repaid or the case is dismissed.

All persons seeking bankruptcy protection must seek pre-bankruptcy credit counseling from a U.S. Department of Justice-approved agency to obtain a certificate that is necessary to file. If you believe you may need bankruptcy protection, contact an approved agency in your area and make an appointment. Your counselor will make recommendations based on your specific financial situation.

Take care of your credit!

See related: Credit card glossary terms to know for bankruptcy, What to expect when filing for bankruptcy, 5 post-bankruptcy myths, Bankruptcy does offer a fresh start, at a high cost

Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.

The Credit Guy answers a question about a debt or credit issue from a CreditCards.com reader each week. Send your question to The Credit Guy.

Published: July 27, 2009



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