Debt, whether it is from credit cards, home mortgages, business debt or car loans, can become scary when it eats up too much of your income every month. I remember coming home from college during my junior year to a smaller family home, and realizing that my parents had moved each year in the past three that I had been gone. This was long before I had any training in finance, but I could tell that there was a problem. Over coffee at the breakfast table, I learned that their real estate business was experiencing minor monthly losses, which were putting pressure on the business’s commercial mortgage payments, which were putting pressure on their personal loans. It was a slow downward spiral eroding their finances.

Debt is a normal part of owning important assets like homes, cars, and businesses, unless it gets to be too heavy. At SUM180, we recognize three levels of debt load in providing our recommendations.

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Debt is a normal part of owning important assets like homes, cars, and businesses, unless it gets to be too heavy. At SUM180, we recognize three levels of debt load in providing our recommendations.

Let’s start with the most severe level. If debt payments are 50% or more of your income, and this is not a temporary situation, bankruptcy may be an appropriate next step to consider. At this level, you’ve exhausted many alternatives like credit counseling, credit consolidation or loan modification, and you are running out of options.

If debt payments are 37%-49% of your income, you are probably a candidate for credit counseling services to help you pay down what you owe and not fall further behind. This can include debt counseling and consolidation; housing counseling for pre-rental, pre-purchase, first-time homebuyer, reverse mortgage, and foreclosure prevention; and/or bankruptcy pre-filing counseling and pre-discharge education. Counseling will likely need to be combined with finding ways to increase income, including taking a second job, reducing large, fixed expenses, including selling or downsizing your home, and managing a tight budget. When you have completed your payments, they’ll help you reestablish credit.

If your debts are less than one third of your income, you are probably in a relatively solid position in terms of being able to handle it and still build a strong financial base for your future. In my parent’s case, once they made a few moves to stop the losses in their business, they were able to catch up on all of their debt payments and begin to rebuild their cash reserves. It was a proud moment, years later, when they sold their business and the building debt free, creating a nice fund for their retirement.

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