A little bit of household debt is as American as apple pie, and can even be good for your financial health like an apple a day. How much debt a household can manage typically depends on their income, creating their debt-to-income ratio. This can better represent a family’s financial situation than unedited numbers due to factors like the increased cost of living in certain areas. Household debt played a key role in the Great Recession, and should be carefully analyzed in the present as experts predict we could be headed for a recession once more. Are you curious about the average debt-to-income ratio in Arizona, and how yours compares to the rest of the state? Read on to learn more, and if you have concerns about the level of debt in your household, consider bankruptcy with your free debt evaluation with our firm. Schedule your free phone consultation today at 602-649-4949.
Arizona’s Debt-to-Income Levels
A debt-to-income ratio is calculated by comparing an individual’s recurring monthly debt payments against their gross monthly income. These debts can include home mortgages, car payments, student loans, credit cards, and more. Income besides a paycheck counts towards this ratio, such as child support payments, pensions, and retirement income, investments, recurring payments from lottery winnings, etc. The ratio is expressed as a percentage, and can be used by lenders as a factor when considering applications for lines of credit. Typically, lenders prefer applications with a debt-to-income ratio below 36%, but some will accept as high as 50%. A ratio higher than these is more likely to result in a default. This percentage can be reduced by increasing income, paying off debts, or a combination of the two.
The Federal Reserve publishes statistics regarding each state’s debt-to-income ratio going as far back as 1999. In Arizona, as of Q3 of 2024, the current average debt-to-income ratio is 1.785, or 17.85%. This figure ranged between 1.32 and 1.4 back in 1999, showing that the average debt-to-income ratio has shot up over the past few decades. Arizona is near the high end of the middle for debt-to-income ratios across states. The three states with the highest ratios are Idaho (19.69%), Utah (18.53%), and Maryland (17.57%). Some of the lowest ratios in the country are in New York (9.31%), Illinois (10.97%), Washington, D.C. (5.4%), Kansas (10.95%), and North Dakota (10.52%). Some of these areas’ low ratios, like New York and Washington, D.C., could be explained by the prevalence of apartment living. When more people live in apartment buildings, they spend money on rent, which doesn’t factor into debt-to-income, rather than a mortgage, which does. But the debt-to-income ratio is also low in more rural states like Kansas and North Dakota. Here, a lower cost of living could explain why people from these areas carry less debt.
Debt-To-Income Ratio In Bankruptcy Considerations
Having a high debt-to-income ratio can prevent you from being approved for loans for assets, which could greatly improve your quality of life. Getting rid of some or all of your debt can reduce your ratio and increase your odds for financial applications in the future. But based on your financial situation, paying off that debt may simply not be a possibility. Here, your debt load could be reduced by instead filing for bankruptcy.
A high debt-to-income ratio could be a sign that you should consider bankruptcy, but not necessarily that you need to file. If your ratio is elevated due to loans for assets with reasonable terms, shedding them through bankruptcy probably isn’t the most effective strategy. This could force you to replace those loans with less favorable agreements. You might also have debts that won’t be cleared by the chapter of bankruptcy for which you qualify. Here, bankruptcy would just be a hit to your credit without improving your debt-to-income ratio.
Filing for bankruptcy doesn’t come without its consequences. A debtor with a high credit score is likely to see a sharp drop in their credit score after filing their bankruptcy petition. However, a debtor with a lower credit score may see a less pronounced effect, or even a slight boost to their score. Some financial institutions are more forgiving towards chapter 13 filings than chapter 7 filings when reviewing loan applications. A bankruptcy debtor should also consider that they will be ineligible for most home mortgages for 2 years after declaring bankruptcy.
If reviewing your debt-to-income ratio doesn’t give you a clear answer about filing for bankruptcy, you should consider how long it will realistically take you to pay off your debts. If you do your best to repay your debts for the next 2-3 years and will still be in the same boat financially, you may need a more powerful form of debt relief, such as bankruptcy. Discuss your options with an experienced professional today by calling 602-649-4949.
Which Debts Are Cleared By Bankruptcy
When determining how a bankruptcy filing could impact your debt-to-income ratio, it’s important to understand which debts are cleared by bankruptcy and which are not. If reducing your ratio is one of your primary goals in bankruptcy, filing the wrong chapter, at the wrong time, and other various factors could affect the dischargeability of your debts.
Filing for chapter 7 bankruptcy only clears debts with unsecured non-priority status. Debts that fall into this category include medical bills, credit cards, personal loans, some taxes, repossession deficiency balances, and unpaid rent and utilities. Some secured loans can be modified through bankruptcy, but the debtor will need to surrender the asset if they wish to completely clear the debt. It’s plain to see that there are several types of debts that would be unaffected in a chapter 7 bankruptcy case.
Chapter 7 bankruptcy wipes out unsecured non-priority debts, but chapter 13 can be used to pay off secured and priority debts that would remain after a chapter 7 filing. Secured debts like home mortgages and auto loans are among the first debts paid in a chapter 13 payment plan, coming after fees associated with the bankruptcy filing itself. A secondary home mortgage can be cleared in chapter 13 bankruptcy under certain circumstances. Chapter 13 bankruptcy can also be used to make headway on priority debts like child support and student loans. If the debtor has unsecured non-priority debts remaining at the end of their payment plan, they can be discharged like in chapter 7 bankruptcy.
How Does Your Debt-To-Income Ratio Compare To The Rest Of Arizona?
Debt-to-income ratio can be a reliable factor to help you decide whether to file for bankruptcy. Your own number may be cause for concern compared to the rest of the state, but everyone’s financial situation is unique. You need clear and honest information to determine if bankruptcy’s benefits will outweigh its costs for you. My AZ Lawyers offers free consultations by phone so you can learn more about the bankruptcy process without risking any time or resources should you choose not to file. Eligible clients can file for bankruptcy in Arizona using our Zero Down payment plan option. Speak to one of our experienced Arizona bankruptcy attorney today by scheduling your free consultation at 602-649-4949.
