Going into debt is a normal part of life for most Americans. Significant purchases such as a house or car usually require loans. Emergencies happen, medical or otherwise, and you may have to max out your credit cards. The causes of debt are numerous.
As the numbers rise, you may wonder if you should start to worry about the debt you are in. When can you tell your debt has become a problem? When should you start considering filing for bankruptcy?
Signs of too much debt
A simple calculation you can do is to compare how much debt you pay each month to how much you make each month to find your debt-to-income ratio. Add up your recurring monthly debts and divide it by your gross monthly income. Multiply the answer by 100 to get a percentage. The cutoff of what is bad differs between financial institutions and experts, but generally speaking, a number above 43 percent is a red flag.
This ratio is not solid proof, however. Other signs include:
- Only paying the minimum amount due for months
- Going through your savings and not being able to replenish the account
- Having trouble with daily expenses, such as gas and groceries
- Using one credit card to pay off another
- Racking up fees for late payments and over-the-limit charges
- Not being able to pay off the debt in a reasonable time frame (ex: one year for credit cards, five for cars)
- Utilizing cash advances and payday loans
Low credit scores and high interest rates may also reflect your financial state.
When to file for bankruptcy
Not every debt situation requires bankruptcy. Another option may be better for your circumstances. Bankruptcy may be best for long-lasting financial troubles, there exists a risk of losing assets or a lender is garnishing your wages. Also, most of your debt needs to be eligible for bankruptcy.