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Is it time to pursue debt relief?

A person’s income to debt ratio and ability to pay off debt with reasonable budgeting may affect whether or not filing for bankruptcy is the right option.

Utah courts saw 985 cases of bankruptcy in a single month according to the United States Bankruptcy Court District of Utah. Of those cases, 609 were a Chapter 7 and 375 a Chapter 13 bankruptcy. Bankruptcy is not the only form of debt relief available, but it is a popular option. Even with so many cases taking place in a single month throughout the state, many individuals are unsure when to pursue debt relief.

Income fails to cover debt

Most judges look at a person's income to debt ratio when figuring out whether or not the individual qualifies for a bankruptcy. If credit cards, medical bills and other debt repayments eat up more than 35 percent of a person's monthly income, there is a greater chance that the person will qualify for some type of bankruptcy according to the National Debt Relief. When someone's income is below the state's median income level, he or she may be able to qualify for this legal process with a lower percentage of debt.

Extreme budgeting will not help pay off debt

Some people are able to pay off student loans, personal loans, car payments and other forms of debt through a change in lifestyle. Reducing money spent on entertainment, groceries and other variable expenses can help someone pay off his or her debt within a five-year time frame. If a person has no hope of paying off debt within five years even with major changes in his or her spending habits, it may be time to consider some type of debt relief.

Understand bankruptcy limitations

Before a person decides to file for bankruptcy, he or she needs to understand the limitations of this debt relief. For example, certain types of debts, such as child support and tax payments, are not erased even after finishing this process. Someone looking to get rid of his or her debt through bankruptcy should also understand the following:

  • Some assets, including vacation homes and second vehicles, may have to be sold off.
  • Bankruptcy can affect a person's credit score.
  • A person can only file for one bankruptcy every eight years.
  • A co-signer not filing for bankruptcy may become solely responsible for debt.

In some cases, an individual can reduce limitations of the process by choosing the best type of bankruptcy, either the Chapter 7 or Chapter 13, based on his or her situation.

Not all Utah residents should file for a bankruptcy, but someone who has more debt than his or her income can cover, will not be able to pay off the debt in five years and understands the legal process may be ready to pursue this debt relief. It can be beneficial to work with an attorney throughout this legal process.