Bankruptcy Alternatives Blog

The "Three Year Rule": How to Evaluate Your Bankruptcy Alternatives

The best bankruptcy alternative is to pay your debts on your own. You will feel better about yourself, and you won’t have a personal bankruptcy showing up on your credit report.

But is repaying your debts yourself a realistic option? Is it realistic to get a debt consolidation loan to pay off your debts?

The answer depends on the “three year rule”. Here’s how it works:

Add up all of your debts, and figure out what monthly payment it would take to repay your debts in three years. For example, ignoring interest, if you owe $36,000, it would take payments of $1,000 per month for three years to repay your debts. If you got a $36,000 debt consolidation loan, again ignoring interest, it would take payments of $1,000 per month for three years to repay the loan.

Obviously you can’t ignore interest, so your actual payments in our $36,000 example would be greater than $1,000 per month; probably closer to $1,300 per month or more depending on the interest rate.

That’s the essence of the three year rule: can you afford to repay all of your debts in three years? If you are exploring your bankruptcy alternatives, the three year rule will help you decide if repaying your debts yourself is a realistic bankruptcy alternative.

Of course you could use a four year rule or a five year rule, but the longer it will take to repay your debts, the less likely you are to be able to succeed.

If you can cut your expenses and get your debts repaid in three years, that’s probably the best option. If you can’t, you will need to explore your other bankruptcy alternatives.