Brad Chaffee from EnemyOfDebt.com offers some great advice for those who are falling behind on debt payments and considering bankruptcy.

The Pro-rata Method can keep creditors off your back and help you avoid future judgments, or the execution of a judgment because you are declaring hardship and essentially asking for an alternative plan until you can afford to make the original monthly payments for all of your debt.

It is in the creditor’s best interest to accept this plan because it’s better for them to receive something rather than the nothing they’ll receive if you filed bankruptcy. You borrowed the money though and you want to pay it back, you just need a little wiggle room until you can get back on your feet.

Pro-rata Method

• The Formula
• Communication
• Transparency

The Formula

The formula is based on your disposable income (money you have left over after paying for essential bills)

Let’s say you have the following debt load:

Debt 1 $7,500 (current minimum $500)
Debt 2 $5,000 (current minimum $200)
Debt 3 $2,500 (current minimum $100)
Debt 4 $2,500 (current minimum $100)
Debt 5 $2,500 (current minimum $100)

Total Debt $20,000
Total Minimum Payment(s) $1,000/mo
Disposable Income $700/mo
You are $300 short.

Formula 1: Figures out what percentage each debt represents of your total debt.

Debt 1 $7,500 divided by $20,000 = .375 (37.5%)
Debt 2 $5,000 divided by $20,000 = .25 (25%)
Debt 3 $2,500 divided by $20,000 = .125 (12.5%)
Debt 4 $2,500 divided by $20,000 = .125 (12.5%)
Debt 5 $2,500 divided by $20,000 = .125 (12.5%)

Formula 2: Determines what your new minimum payments will be.

Debt 1 $700 multiplied by .375 = $262.50
Debt 2 $700 multiplied by   .25 = $175
Debt 3 $700 multiplied by  .125= $87.50
Debt 4 $700 multiplied by   .125= $87.50
Debt 5 $700 multiplied by   .125= $87.50

Communication & Transparency

Communicating with your creditors and being as transparent as possible will make this process much smoother. When/if your disposable income changes so should your minimum payments.

It’s important for you to let your creditors know that you wish to honor your obligation. You have every intention of paying them what you owe; you just can’t pay them the full minimum payments as they are.

Send each creditor a letter explaining your situation, why you’re experiencing hardship, and be sure to attach your budget and pro-rata forms with the letter.

The key is communication.

If your creditors feel you are doing everything you can and have every intention of paying them the money you owe them, the less likely you are to end up in court or to have your wages garnished.