What is a manageable debt-to-income ratio?

On Behalf of | Nov 2, 2016 | Bankruptcy Law Basics

Many people who file for bankruptcy do so because they can no longer manage their debt. With 80 percent of American households holding some form of debt, many people are “comfortable” with the concept of living in the red.

However, with the price of household goods inflating, you may feel like you are working harder than ever to pay your bills. Therefore, it is important to understand how debt payments fit into your monthly budget of income and expenses.

What is manageable?

One of the main factors of manageability when considering your budget should be your debt to income ratio (DTI). That is, what percentage of income are you paying toward debt? The level of debt considered ‘manageable’ depends on your gross monthly income compared to other recurring payments including housing costs, insurance premiums, car payments, student loans and credit card bills.

A conventional limit for DTI is considered to be 36 percent. This percentage should take into account your housing expenses plus recurring debt and is often the number a bank will look at when considering you for a home mortgage. 36 percent leaves you at a ‘safe’ level to absorb an unexpected financial burden, such as emergency medical expenses or unplanned car repairs, while still allowing you to pay your debt to creditors on time.

What if I’m above that number?

Although a DTI above 36 percent does not mean that a declaration of bankruptcy is imminent, it may be a sign that it is time to re-evaluate your financial situation. Early warning signs of an adverse financial situation include increasing levels of debt despite making regular payments, dipping into long-term accounts like retirement savings to pay bills or the value of your home falling below your current mortgage balance.

If you have considered other debt management options and continue to fall behind, bankruptcy may be the right choice for you. Filing for bankruptcy does not mean that you have failed as a person. Instead, it is a fresh start for your finances. There are options for you to liquidate debt without losing valuable personal assets like your home or car.

Finding a way forward

It is okay to ask for help when your debt reaches unmanageable levels. Misconceptions can be clarified by speaking to a bankruptcy lawyer about your financial situation. Likewise, seeking legal advice before going to creditors or other relief agencies can prevent you from falling victim to predatory practices.