Do You Have Too Much Debt? How to Tell If You’re in Over Your Head Financially Skip to main content

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Do You Have Too Much Debt? How to Tell If You’re in Over Your Head Financially


Drowning in debt

Are you in too deep with debt?

Image Source: Flickr User Almanness Photography

Debt is a fact of life in North Carolina and all across America. We expect to be in debt from the time we start college and take out our first student loan and sign up for a credit card – and throughout our lives. Student loans, credit cards, medical bills, mortgage, auto loans and more – they are all a fact of life. To some extent, debt can be a good thing. It allows you to be a homeowner, have a reliable car to make it to work and to obtain a college degree. But how much is too much? And how can you know when you’re in too deep and need help?

The 28/36 rule

There’s a financial principle called the 28/36 rule. This guideline suggests that 28% (or less) of your gross income should go to all costs of housing and 36% (or less) on your total debt servicing including your housing costs. Many lenders and creditors use these percentages when they decide to offer you more debt so they can assess your ability to pay. Let’s look at what these numbers would look like in practice.

If, for instance, you and your spouse earn $70,000 together. The 28% for housing would be calculated as $70,000 x 28% = $19,600 / 12 = $1,633 per month. In this scenario, healthy housing debt would be this amount or less. That means mortgage (or rent) payment plus mortgage (or renter’s) insurance plus property taxes plus HOA fees should not exceed that amount.

In this scenario, a $1,200 mortgage, $200 property tax (based on $2,400 annual taxes), $83 property insurance and $50 HOA (based on $600 annual charge) would equal $1,533. That leaves $100 a month for property maintenances. That meets the requirement. Then you look at 36% minus the 28% already consumed and you have 8% of your gross income left for other debt.

$70,000 x 8% = $5,600 = $466 per month for all other debt. If you have a $150 student loan payment and $250 car loan payment, ideally, you should spend no more than $66 a month to service other debt. This would include credit cards, medical debt, personal loans or other finance arrangements. You can quickly see that these numbers could be challenging to meet.

How Can You Get Out of Excessive Debt?

If you are beyond these percentages, you are likely not able to save, may be making just minimum payments on credit cards and not contributing to a retirement plan. This means not only are you likely struggling now, but there’s a good chance you will be in the future based on your inability to save for emergencies or in advance of your retirement. But there is a way out.

First, if you’re under on one percent or the other (the 28% or the 36%) you can devote any excess cash towards lowering the other percentage. For instance, if your housing costs are lower than the 28%, put the difference towards paying down your credit cards. And if it’s your housing costs that are excessive, you may want to try and refinance to get a lower payment.

If your student loans are pushing you past the 36% total debt, you may want to consider applying for an income-sensitive repayment options like Pay As You Earn or Income-Based Repayment. But if your debt is so extreme that you’re living paycheck to paycheck, are getting debt collections calls, can’t save and are maxed out on your credit cards, you need a more serious solution.

Chapter 7 or Chapter 13 bankruptcy can be the help you need. Chapter 7 discharges unsecured debt like credit cards and medical bills. Chapter 13 gives you time to catch up on your bills. To find out if bankruptcy is a fit for you, contact the Law Offices of John T. Orcutt. Call +1-919-646-2654 for a free consultation at one of our locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.

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