Financial Literacy Month – Avoid Bankruptcy Using the Pro-Rata Plan

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.

About Brad Chaffee

4 Responses to “Financial Literacy Month – Avoid Bankruptcy Using the Pro-Rata Plan”

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  1. Have you or others you’ve known used this method? I’m curious of the results.

    • Brad Chaffee says:

      Nope. I’ve tried to get a few people to give it a go but unfortunately they decided to file bankruptcy instead. I have found that once someone decides to file bankruptcy nothing will stop them from doing it, not even the fact that they borrowed the money they are filing bankruptcy on.

  2. I’ve tried to talk a good number off the BK edge myself. If I recall correctly the prorata plan should only be used for a few months, not a long term solution-per the folks at Dave Ramsey HQ.

    • Brad Chaffee says:

      It’s a little more than two months but yeah it’s definitely a temporary solution to avoid bankruptcy. The person using the plan really needs to make some adjustments to their budget and life so that they will eventually be able to pay their original minimum payments again. I’ve heard Dave Ramsey throw 2 years out there. He said that it was possible to hold off creditors for up to two years but anything after that would be pushing it. I think it really all depends on how the creditor views a persons “progress” using the plan. If they see someone just wanting to make lower minimum payments for long periods of time without any changes to income or amount paid they probably start the process. Most people just need to adjust their lifestyle. 😀

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