The Role of Debt-to-Income Ratio When Filing for Bankruptcy in Arkansas

Arkansas consumers who contemplate filing for bankruptcy do so because they’ve accumulated a significant amount of debt and are either struggling or completely unable to make their monthly payments. Bankruptcy is a federal process that allows consumers to either lower or completely wipe out their debts, consequently also enabling them to potentially avoid foreclosure. However, many consumers struggle with determining whether or not their current financial situation would render them a good candidate for bankruptcy.

Determining whether or not you will qualify for bankruptcy in Arkansas is a complex process that involves a comprehensive review of numerous factors, preferably executed by an experienced bankruptcy lawyer. Yet, there are certain indicators that can let you know if bankruptcy would be the right choice for you, including your debt-to-income ratio.

Understanding Debt-to-Income Ratio

Debt-to-income ratio (DTI) is the percentage of the consumer’s monthly gross income that is allocated toward paying their debts. However, what is considered “debt” for the purposes of calculating DTI can vary. In this case, the term “debt” is used to describe a number of major monthly payments, which fall into one of two categories: front-end-ratio DTI and back-end-ratio DTI. 

Front-End-Ratio

The front-end-ratio takes into account the percentage of the consumer’s income that is used to pay housing expenses, including monthly mortgage payments, mortgage insurance, rent payments, renter’s insurance, homeowner’s insurance, association fees, and property taxes.

Back-End-Ratio

The back-end-ratio refers to the income percentage that goes toward paying all recurring monthly debts, including those listed under the front-end-ratio and others, such as credit card bills, car loans, student loans, personal loans, child support payments, alimony payments, and legal expenses.

The Impact of Debt-to-Income Ratio Both During and After You Exit Bankruptcy

If you file for bankruptcy in Arkansas, you can expect to see a significant drop in your credit score initially. Although your debt-to-income ratio doesn’t directly impact your credit score, it plays a significant role when you are ready to apply for credit again. Lenders take both front- and back-end-ratios into account when determining if a prospective borrower qualifies for a credit card, mortgage, or other type of loan, so the lower your DTI, the better your chances of being approved. 

Your total credit utilization, however, does impact your credit score. Since bankruptcy lowers or eliminates the total amount you owe creditors, your credit score will eventually start to come back up as your total debt decreases. If you file for Chapter 7 bankruptcy (liquidation), your debts will be discharged, which means you’ll likely see a much faster positive impact on your credit than those filing for Chapter 11 (reorganization) bankruptcy. Since Chapter 11 calls for repaying your debts at a lower, court-approved amount over a period of time, the changes to your credit score will be more gradual, but you can still expect a progressive positive impact.