Monday, August 31, 2009

What is a debt ratio and why should I care about it?

Your debt ratio is the amount of credit you’ve accumulated on a monthly basis compared to your income.

It’s a critical number if you plan to make any major purchases, such as a home or car, since lenders check your debt ratio to ensure you’re capable of repaying the loan.

Mortgage lenders generally won’t approve your loan if your mortgage payment would exceed 28% of your gross income (before taxes are withheld).

Your total payments -- including all other debts -- should not exceed 36% to qualify for a mortgage.

These debts don’t include food, utilities or taxes.

For these calculations, mortgage lenders look at items like credit card bills, student loans and car loans and how your mortgage would affect your overall ability to pay.


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Bankruptcy: 4 Tales from the Trenches

One of the scariest aspects of bankruptcy is the fear of the unknown. These real-life stories can help you know what to expect -- before, during and after.

By Sally Herigstad
MSN Money

Bankruptcy can happen fast -- when a person is successfully sued or when unexpected medical expenses run up. Or it can happen in slow motion, when a business fails or long-term unemployment makes it impossible to keep up with bills. No matter how a person gets to the point of considering bankruptcy, the worst thing about it is the unknown.

The biggest bankruptcies ever

What really happens to you when you file for bankruptcy? What do you have to do? How do you survive afterward?

Four real people, Michael, Robert, Robin and Andrew, shared their experiences going through bankruptcy. (Only Robert allowed us to use his real name.)

Robert Nickell, a pharmacist and chairman of the Nickell Group, filed for bankruptcy in 1999, when he was 39. He lost his business, a pharmacy in Manhattan Beach, Calif., after accumulating more than $600,000 in debt then going through a protracted divorce.

Robin, 31, thought she was covered by health insurance when she spent a week in the hospital after a car accident. She was mistaken. She was already in debt from starting a freelance copy-editing business; with the hospital bill, her debts topped $65,000. Then she lost her job. That was the last straw.

Michael practiced medicine in Oregon for 45 years. He filed for bankruptcy at age 72, when he could no longer work and had no savings to fall back on. He was going through a divorce at the time as well. He owed about $50,000 in back taxes, medical bills and business debts.

Andrew, 36, and his wife, Ashley, 35, owned a retail company in Colorado that sold wireless products, telephones and satellites. They had a great run with it, but between a merger and employee theft, they ran up about $300,000 in debt. They filed for joint bankruptcy two years ago.

Some aspects of bankruptcy weren't as bad as they thought they would be. Other aspects were worse. Here's how it went:

The buildup: How did I get here?

Robert, Robin, Michael and Andrew all found themselves sliding into the circumstances that led them to choose bankruptcy.

Michael had barely broken even in his medical practice for years. He had planned to work until he died, but health problems forced him to retire. His phone rang constantly as creditors sought him out. Eventually, he quit answering it. Bills were stacked all over the office; he stopped opening them. He had given up long before he actually filed for bankruptcy.

Robin had been earning $50,000 a year at a dot-com company. One day, she came to work and was handed a box and a paycheck and told, "This is your last day." Robin moved back to her hometown and quickly found a job. She thought she was getting back on top of things, chipping away at her debt.

Then she was hospitalized, which ended her new job. She could put only a little toward the hospital bills. Living on $1,000 per month in unemployment "gave me a whole new way to look at possessions," Robin says. But cutting back wasn't enough to cut it. Within a few months, her debt was turned over to collection agencies.

Robin hated the phone calls the most. Her father advised her to not answer the phone, but even checking messages stressed her out. Most callers were friendly, but a few were ugly. "One in particular really berated me and said, 'Did you think you could spend this money and not pay it off?' It really upset me because I already did feel guilty."

Robert says, "Pre-bankruptcy is one of these very scary things where you can't believe that you got into this mess.


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