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By Barbara O’Neill, Ph.D., CFP®, AFC® [email protected]

Personal financial managers (PFMs) are well aware of signs of overextended credit and debt. Some of the most common indicators that individuals and families have too much debt are when they…

  • put off paying bills because they do not have enough money to cover what they owe
  • juggle bills just to get by because they cannot pay all of their expenses every month
  • use credit cards or payday loans to buy necessities, such as food, gas, or rent
  • get a cash advance from one credit card to make a payment on another card
  • avoid answering the phone because of frequent calls by bill collectors about late payments
  • argue with family members about debt and money problems

These are only a few indicators that people have a problem with debt. Another is their consumer debt-to-income ratio. Numbers do not lie. To determine if they have more debt than they can manage, PFMs can add up monthly consumer credit payments. Do not include a mortgage or rent and utilities, but, rather, consumer debts like credit cards, a car loan, and student loan payments. Next, determine clients’ monthly after-tax (net) income.

Finally, divide monthly consumer debt payments by total net monthly income. The result is the client’s debt-to-income ratio.  For example, if total monthly credit payments add up to $350 and total monthly after-tax income is $2,000, the debt-to-income ratio would be calculated as 350 divided by 2,000 = .175 or 17.5%.

What do ratio percentages mean?  If a debt-to-income ratio is 10 percent or less, people are probably in good shape, credit-wise, and can handle their monthly payments. If the ratio is 15 to 20 percent, they are probably starting to experience financial difficulty, especially if they have other large expenses such as a mortgage or child care. If the ratio is over 20 percent, most people have too much debt and need to curtail their spending. So much after-tax income earmarked for debt payments does not leave much money for other household expenses.

What to do? Below are eight strategies to help clients deal with, and dig out from under, a mountain of debt:

  1. Increase Income– Have clients consider strategies like adjusting tax withholding on Form W-4, getting a “side hustle” freelance job, selling unneeded assets, and taking advantage of public benefits that save money.
  2. Decrease Expenses- Talk to clients about lowering the cost of their cell phone plan and, searching out less expensive housing, lowering settings on thermostats, preparing more meals at home, and shopping at thrift stores.
  3. Contact Creditors ASAP- Work with clients so they can explain the reason(s) for getting behind on debts and seek concessions from creditors, like lower interest or payments. Remind clients to get agreements in writing and to check their credit reports to see how altered payments are reported.
  4. Consider Credit Counseling- Clients may need to contact a non-profit credit counseling agency for assistance with budgeting or to participate in a debt management program that prorates a monthly payment to a client’s creditors.
  5. Consolidate Debt– Consider talking to a client about taking out a new loan to pay off high-interest debt like credit cards. Clients should only do this if interest rates are lower than their current debts and they will not be tempted to overspend again.
  6. Accelerate Debt Repayment– You can help clients use a tool like to create a schedule to repay debt faster by adding more money to payments owed to remaining creditors once previous creditors have been repaid.
  7. Voluntary Surrender- PFMs may want to have clients consider returning an unaffordable secured asset (e.g., car) to a creditor if payments are unable to be made. Doing so saves on repossession fees and having a “repo” listed in a credit report.
  8. Consider Bankruptcy– Suggest that clients see an attorney if their debt load is substantial. There are two types of bankruptcy: Chapters 7 and 13. Consider possible effects on a Service member’s security clearance.

For additional information about strategies to deal with debt, review the University of Georgia Extension publication How to Get Out of Debt.