September 5, 2017

Most people who file for bankruptcy have strong credit scores according to Trans Union.

It is true that a bankruptcy filing will show on your credit report for a period of 6 years following discharge, for first time bankrupts.   But that doesn’t necessarily mean that you will not be eligible for credit during that period but it will likely be harder to get.

By the same token, having a “strong credit score” or a “good credit report” doesn’t necessarily mean that you will qualify for more credit.  Many people who have good credit reports are so far in debt already that they are not eligible to add more debt to their portfolio.

Banks use debt “service ratios” as an indication of eligibility for more debt.  The assumption is that you can use up to 48% of your gross income to service debt.  If you require more than 48% of your gross income you are no longer eligible to borrow more money.

For example if you earn $40,000 a year and if the bank is using 48% of your gross income as the debt service ratio the formula would look something like this:

$40,000 x .48 = $19,200 therefore using this ratio you can afford to pay $19,200 per year or $1,600 per month to service all of your debts, including mortgage and car loan debt.

In effect then, if you have a mortgage payment of $900 per month and a car loan at $500 you only have $200 left to service any further debts you may have.  Assuming a minimum monthly payment of 2.5% of the total outstanding balance if you charged $8,000 on a credit card your minimum monthly payments would be $200.

Also keep in mind that the $19,200 is pre-tax income!