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How to Know When Your Debt is Unmanageable

Updated on February 27, 2013

How to Know When Your Debt is Unmanageable

Making the decision to file for bankruptcy isn’t easy. There’s a social stigma surrounding the bankruptcy process and many people are afraid they’ll never get back on their feet, be able to buy a house, or get a loan after filing. The truth, however, is that in some cases bankruptcy is the only option. The key is being able to determine whether or not your debt is manageable or has become out of control. If the latter, you may need to consider filing for bankruptcy. But how can you tell if your debt is too much?

Calculate Your Debt to Income Ratio

Your debt to income ratio is a number that helps you to determine how much monthly debt you have as compared to the amount of income you bring in each month. When determining your debt to income ratio you need to take all of your debts into consideration. Some lenders, when making this calculation in order to give a loan, do not consider a person’s mortgage or rent payments as debt but they certainly should as they do take away from the bottom line.
When determining your debts you should consider all of the following (if applicable):

  • Your monthly rent or mortgage payments;
  • Your monthly automobile loan or lease payments;
  • Your monthly student loan payments;
  • Your child support or alimony payments;
  • Payments you must make on personal loans;
  • Your monthly credit card payments (add double your minimum payment); and
  • Payments on any type of revolving credit account you have.

After you’ve calculated your monthly debt you’ll need to calculate your monthly income. In order to do this you need to consider:

  • The amount of take-home pay you receive from your primary job after taxes and deductions;
  • Additional pay you receive annually in the form of a bonus (divide this by 12 and add it to your monthly total);
  • Any income you earn from part-time jobs, home-businesses, etc.

After you have both numbers you’ll need to divide your total monthly debt by your income. The percentage number you get from this calculation is your debt to income ratio. The lower your number, the less debt you have in comparison to your income.

What if My Debt to Income Ratio is too High?

If your debt to income ratio is too high you’re going to start having trouble paying all of your bills on time. Most credit professionals and financial analysts consider a debt to income ratio lower than 36% to be good.  Anything higher means you’re stretching your budget.

Why only 36%? You’d think that if your debt was 36% that you’d have the other 64% to play with, right? Wrong. Remember, the items we listed above when considering your debt did not include monthly insurance payments, utilities, cell phone charges, cable television charges, clothing bills, food bills, gasoline for your car, and anything else you might have to pay monthly. Some of these things are considered luxuries while others are necessities but not “debt creators.” To get a true picture of your budget you’ll need to consider those payments as well.

If your debt to income ratio is over 36% you may need to speak to a bankruptcy lawyer or financial analyst in order to determine the best ways to reduce your debt. Bankruptcy isn’t your only option but it may be the one that gives you the best chance at a fresh financial future.


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