A debt-to-income ratio is expressed as a percentage that represents how much of your monthly income goes toward debt repayment. So a DTI of 20%, for example, shows that your monthly debt costs are equal to 20% of your gross monthly income.

The lower your monthly debt costs and the higher your income, the lower your DTI. But if you borrow more or your income is lower, your DTI will be higher.

There are two types of debt-to-income ratios that a lender might consider.

Your front-end DTI compares your total housing or mortgage costs to gross monthly income. It’s sometimes also called your housing-expense-to-income ratio. This is based on your full mortgage payments if you have a mortgage, and would include principal, interest, property taxes, homeowners association fees and insurance costs. If you rent, it would be your monthly rent amount. It doesn’t include non-fixed costs such as utilities.

Your back-end DTI compares your income to the minimum payments on your outstanding credit accounts, including mortgage and non-mortgage debt. That means your back-end DTI includes:

• Monthly payments on installment loans such as student loans, car loans or personal loans
• Housing expenses, such as monthly rent or full monthly mortgage costs (as outlined above)
• Minimum monthly payments on revolving accounts such as credit cards or lines of credit
• Other financial obligations such as child support or alimony

Your back-end DTI is more commonly considered by lenders when you submit a loan application. A mortgage application will usually consider both your front- and back-end DTIs when deciding if you qualify.

Because a back-end DTI is more commonly used, assume that we’re referring to this number unless otherwise noted.

Why lenders favor applicants with lower DTIs

Most lenders will also consider your DTI to decide if you can reasonably afford to take out and repay an additional debt. A low DTI tells them that you have room in your budget to take on and repay new debt, increasing your chances of getting approved for credit. But a high DTI could be a red flag to lenders that you’re already stretching yourself thin and pose a larger lending risk.

If you’re planning to apply for a home loan, car loan or other types of credit, it’s important to figure out your debt-to-income ratio. Knowing your DTI will clarify whether you’re likely to qualify for new credit, or if you need to take steps to compensate for a poor ratio.

Even if you aren’t planning to take out a loan soon, maintaining a healthy DTI can be a good idea. It’s a sign that you’re managing your finances well and avoiding taking on more debt than you can afford, and it will also make it easier to get a loan in an emergency or unexpected event.

As you take stock of your debt payments and income, you might be wondering how good a debt-to-income ratio needs to be. When lenders assess your loan application, what is a good DTI?

While DTI standards can vary by lender and product, some general rules can help you figure out where your ratio falls. Here are some guidelines about what is a good debt-to-income ratio:

• The “ideal” DTI ratio is 36% or less. At least, that’s the common financial advice of the “28/36 rule.” This guideline suggests keeping total monthly debt costs at or below 36% of your income, and housing costs at or below 28%. (You can calculate this number for yourself by multiplying your monthly income by 0.36 or 0.28). A DTI in this range will result in affordable debt and give you the ability to qualify for additional credit when needed.
• The maximum DTI for most lenders is 43%. This is typically the threshold for getting a new loan, according to the Consumer Financial Protection Bureau. Borrowers with a debt-to-income ratio exceeding 43% are shown to be more likely to struggle with monthly costs. You’re much less likely to get approved for a loan with a DTI above 43%, and might need to seek alternative products.
• The maximum front-end DTI ratio for a home loan is 31%. At least, that’s the rule set by the Federal Housing Administration for loans it guarantees. Most lenders will want to see that the total costs of your new FHA mortgage payment are equal to or less than 31% DTI. For non-FHA loans, the guideline is a front-end DTI of below 28%, according to the National Foundation for Credit Counseling.
• The lower your DTI, the better. As mentioned, a high ratio of debt to your income could be a sign that you can’t afford to take on more debt. So the lower your DTI, the better — while a 36% ratio is good, a 20% DTI would be viewed even more favorably.

How to calculate your debt-to-income ratio

Now that you know what is considered a good debt-to-income ratio, it’s time to calculate your own. Here’s a step-by-step process to calculate your DTI.

1. Look up all your monthly debt costs. To figure out your debt-to-income ratio, you’ll need an accurate dollar amount of every debt you pay each month. Find the monthly minimum payments for your mortgage (or rent, if you don’t own a home), student loans, car loans, credit cards and other financial obligations.
2. Add your monthly payments together. Add up the dollar amounts of all these monthly payments to get the total you pay toward these each month. (If you want to figure out your front-end DTI, include only your housing-related costs.)
3. Figure out your monthly income. You’ll need to use your gross income, and include all income sources, including overtime pay, bonuses and pay from a second job or side hustle. A salaried employee can divide annual income by 12 to find monthly income. If you’re hourly or your pay fluctuates, review recent pay stubs to figure out your typical monthly income.
4. Divide monthly debt costs by your monthly income. This will give you a decimal figure, which, if you multiply by 100, is your debt-to-income percentage.

If you follow these steps, you can calculate your DTI. Here it is as a mathematical formula:

(Sum of all monthly debt payments / Gross monthly income) * 100 = Your debt-to-income ratio

You can also use a calculator to automatically generate your DTI. We like the straightforward DTI calculator from our sister site Student Loan Hero, which generates both your front-end and back-end ratios.

After running the numbers on your debt-to-income ratio, you might be worried that yours is too high. Fortunately, you do have some control over your DTI and, with some time and effort, could decrease it.

The way to do that is to work on the two things that factor into this ratio: your income and your debt costs. Here are some ways you can work on each of these to improve your debt-to-income ratio.

1. Avoid taking on more debt

Any new debt you accrue will only push your DTI higher. If you’re already uncomfortable with how high your debt-to-income ratio is, that’s a sign that you need to stop borrowing until you get it under control.

Take a look at your budget to ensure you’re living within your means and not spending more than you’re making. If you’re used to spending with credit cards, consider putting these away and paying only with debit cards or cash. Save up for major purchases or emergencies, too, so you can rely on your funds instead of borrowing to cover upcoming or surprise expenses.

2. Pay off low balances first

Every time you pay off a debt completely, you eliminate the monthly payment from your budget. So making extra payments on some of your credit accounts could be a smart way to lower your monthly costs.

This can be especially effective if you follow the debt snowball method, which targets your lowest balance first to quickly eliminate your smallest debt. Each time you pay off a loan or credit card, you’ll get rid of a monthly payment and lower your DTI in the process.

On top of decreasing your DTI, following the snowball repayment method will also get you out of debt faster and save you money that you’d have otherwise spent on interest.

But if you’re looking to get out of debt faster by reducing your total interest costs so that more of your monthly payments go toward the principal balance, you could opt for debt consolidation. With debt consolidation, you can take out a personal loan to pay off existing debts. The new loan should have a lower interest rate.

Debt consolidation could also help your DTI ratio by lowering your monthly payment. If you choose a longer repayment term, your monthly payments may decrease, which positively affects your DTI ratio. But a lower monthly payment may mean you’ll be in debt longer.

If you want to explore debt consolidation loan options, you can try out LendingTree’s personal loan tool. You’ll fill out basic information about yourself, your finances and what you need out of a loan. Then you may receive loan offers from lenders you can review. Note that LendingTree owns MagnifyMoney.

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3. Refinance your debt

Another smart strategy to lower your monthly debt payments is refinancing. When you refinance debt, you use a new loan to pay off and replace a previous loan. Doing so gives you a chance to get a loan with terms, costs and payments that are a better fit for your needs.

Here are the main ways that refinancing student loans, a mortgage, credit cards or other debt can help lower your monthly debt costs and, in turn, your DTI.

You can refinance to a lower rate. Your monthly debt payments will include a payment to both your principal, as well as an interest charge. The former goes toward lowering your balance, while the latter is an additional cost you pay in exchange for borrowing these funds.

The interest costs are based on your interest rate. Refinancing can be an opportunity to replace a high-interest debt with a new, lower-interest loan. This, in turn, can help lower your monthly debt costs.

You can refinance to a longer loan term. Since refinancing means getting a new loan, it could also give you the chance to choose a longer loan term. This stretches out your debt repayment over more monthly payments, so you pay less each month.

Say, for instance, you bought a home with a 15-year mortgage but have found yourself uncomfortable with how high your monthly payments are. You could consider refinancing to a 30-year mortgage to decrease your mortgage payments and lower your DTI.

As you consider refinancing, watch out for potential downsides as well. Switching to a longer loan term will increase the total interest you pay over the life of the loan, and refinancing can also trigger new loan fees or closing costs. Weigh the benefits and drawbacks for your situation to see if refinancing makes sense.

4. Earn more at your day job

While it’s important to pay attention to your debt, don’t overlook the other side of the DTI equation: your income. One of the most effective ways to lower your debt-to-income ratio is to increase how much you earn at your day job. Here are a few strategies that can make that happen:

• Pick up more hours. If you’re not full time, ask your manager for an extra shift or offer to cover for your co-workers. Even full-time workers can sometimes pick up overtime to boost pay, so check with your manager for such opportunities.
• Work toward a raise. Has it been a while since your pay was bumped or have you taken on new responsibilities? Do you have other reason to think you’re underpaid for your work? Start a conversation with your manager about your pay to see if you can negotiate a pay raise now or set a performance track to qualify for one.
• Seek higher-paying jobs. Switching to a new company can be one of the best ways to get a big pay increase. Do some research into your local job market to figure out what you’re worth and uncover employment opportunities to pursue.

5. Start a side hustle

Use your off-hours to earn more with a second job or side hustle. This can help you generate more income that can be included when calculating your DTI. As a bonus, this additional pay can be the perfect source of funds to pay your debt off faster.

Here are some side hustle ideas to consider:

• Pick up an hourly second job. You can get a range of part-time jobs in your time off, from teaching a fitness class to tutoring on the side or waiting tables.
• Consider freelancing, consulting or coaching. If you have specialized skills, you can apply them after hours and get paid a premium to do so.
• Try a money-making app. You’ve heard of Uber and Lyft — and might have considered driving for them yourself. But these aren’t the only ways to make money from apps. You can use apps to earn extra money baby-sitting, pet-sitting, cleaning houses, renting out your spare car or room or delivering groceries or takeout to make extra income.

6. Look for ways to offset your DTI

If you can’t or don’t want to wait for your DTI to decrease to apply for a loan, you might still have options. Some mortgage lenders will grant you a loan with a debt-to-income ratio over 43% if you can compensate in other areas of your financial history. One way is by having large cash reserves on which you can fall back.

Applicants who can qualify on their own can also add a cosigner to their application. You and your cosigner will be equally responsible for repaying this debt, and both your incomes and DTIs will be considered as well. Adding a qualified cosigner could help you surpass DTI requirements that you couldn’t meet on your own.

Lastly, you can work to optimize other factors considered on credit applications to improve your approval chances. Building your credit to achieve a good score, for example, can go a long way toward offsetting a higher debt-to-income ratio.

Your DTI is an important measure of your health that should matter to you as much as your credit score or reports. Check in on your debt-to-income ratio whenever it might have changed, such as after paying off a loan or working a side hustle for a few months. Tracking your progress can highlight how far you’ve come and keep you motivated to continue working on your DTI.

1. Create a budget

Budgeting is the process of tracking your income, bills and expenses in order to assess how much you can spend and what you can afford each month. Creating a budget and sticking to it is the foundation for financial success as it helps you to live within your means and avoid debt.

“The first thing I recommend to most young people starting out is to understand a budget,” said Corbin Green, a growth and development director and financial advisor based in Salt Lake City. “People need to understand what money is coming in and what money is going out each month, and have it laid out in an organized fashion.”

When creating a budget, you’ll want to write down:

• Your income: How much are you making each pay period?
• Your expenses and recurring payments: What does your rent/mortgage, utilities, groceries and gas add up to each month?
• Debts owed: How much do you owe for student loans, car payment, credit card debt?

Once you’ve assessed your income and expenses, you can make your budget.

2. Pay yourself first

Once you’ve outlined your initial expenses, such as your mortgage, car payment and utilities, it’s crucial to add an “expense” of paying yourself first to start building up a short-term and long-term savings account. Treat your savings and retirement account like a utility bill — it must be paid monthly and on time.

“My recommendation is to pay yourself first. The first bill paid each month should be money to your savings account, then your essential bills and anything left over at the end of the month is fun money,” Green said. “The biggest mistake I see is the younger generations make is not saving early enough. They tend to have a ‘kick the can down the road’ attitude and put off savings until their 30s.”

Let’s look at an example: Assuming you want to have $1 million in savings by the time you retire at age 65, this is how much you’ll need to invest each month:

“This generation lives lavishly, so the number we coach people to save is around 20% of their income. That should help them maintain their current lifestyle in retirement,” Green said. “If you want more travel and more fun stuff during retirement, saving 30% of your income will help you live a lifestyle above what you’re currently living.”

Time is on your side when you’re young. A little bit of money saved now is going to make a big difference later. Make your savings payments consistent, sustainable and automatic.

3. Start an emergency fund

In addition to your retirement account, you’ll want to start an emergency fund. An emergency account is money set aside specifically to cover the cost of an unexpected expense. This account usually consists of three to nine months’ worth of money that is easily accessible in case of an emergency.

If something unexpected were to happen (i.e., inability to work, illness, loss of income), you’d have quick access to cash that would sustain you long enough to pay your bills and allow you to find a qualified job.

4. Pay off existing debt

The average millennial has an average of $23,064 in debt, according to a recent study by LendingTree, the parent company of MagnifyMoney. Debt — or money owed to a lender — can be crippling to your financial, and even your physical and mental health.

Large amounts of debt can seem daunting to pay off, but it’s important to make a plan, start paying it off quickly and include it in your budget as a monthly payment. If you have more than one debt, how do you know which to pay off first?

Green suggests consolidating debt to one payment with a lower interest rate when possible. You may find and compare personal loans you can use to consolidate debt using this tool from LendingTree. You’ll input some personal information before getting to review loan offers.

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24 to 60

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But you may be more driven to try the debt avalanche or debt snowball methods of repayment.

“The financial professional in me says to put more money toward the debt with a higher interest rate and some money at the debt with lower interests rates; but never focus on just one expense at a time,” Green said. “But as a human, you may ask yourself ‘which of these debts is a moral victory to pay off?’”

If you owe money to a friend or family member and paying that debt off is a mental relief, Green suggests paying that off first and then moving on to other debts.

As a young adult, it’s important to make a plan to pay off and manage your debt to avoid heavy interest fees.

5. Build credit

A credit report is a report that shows your credit history and is used to determine your creditworthiness. Building a strong credit history and maintaining a high credit score are essential for your financial health. In your early 20s, it’s important to build your credit by paying your credit cards and utilities on time but avoiding debt in the process.

“Never live above your means and use credit for money that you don’t have,” Green said. “I never recommend buying anything on credit unless you have the means to pay it off in full at the end of every month.”

Using a credit card to build credit is a smart use case, but if you can’t afford to pay it off by the end of the billing statement, you probably can’t afford it in the first place.

6. Protect yourself financially

As you enter adulthood, you’ll want to make sure that you are protecting yourself and your finances with adequate insurance. Take advantage of the benefits offered at work — health insurance, life insurance, short and long-term disability insurance and 401(k) match, if offered. You may consider additional benefit packages outside of what your work offers.

“I always recommend you have something outside of work so you have control and coverage should you leave your employer,” Green said.

Managing your money and knowing where to get started with financial planning can be overwhelming and confusing — especially when you’re in your 20s. Finances can be complex, but it’s essential to educate yourself, find out what resources are available to you and start having financial conversations earlier rather than later in life.

1. Pick up more hours

One of the simplest ways to get more money is to work more. If you have an hourly job, let your supervisor and co-workers know that you’re available to cover extra shifts. You can also volunteer to work overtime if there’s a need, such as if your team is currently understaffed or is particularly busy.

These extra hours can be a big help, and you’ll see the results fast — as soon as your next paycheck.

2. Take a second look at your pay stubs

It might be worth reviewing your pay stubs anyway, to see if you can increase your take-home pay with doing any extra work.

If you usually receive a big tax refund, for example, that could be a sign that you might be able to withhold fewer taxes and boost your take-home each pay period.

You can also revisit your pay benefits, and consider scaling back contributions to a retirement savings account or other benefits to pay off debt instead.

3. Get a second job

If you’re a salaried employee or can’t get extra hours at your day job, consider getting a second job to generate some additional income. Jobs based on tips, such as waiting, bartending or delivering food, can be particularly lucrative. Many retailers also hire seasonal workers to help out during their busiest times of the year.

Check around to see who’s hiring in your area and find opportunities to pick up some extra work — and earn some extra money.

4. Offer freelance or contract services

Skilled workers and professionals can often make even more in their off hours if they find a way to leverage their know-how to demand higher pay. If you earn more for every hour you work, that will generate even more money you can use to pay off debt.

As a freelancer or contractor, you can offer your services in anything from marketing and web development to performing home repairs or remodels. Figure out what you can do that would make you a valuable freelancer or contractor and line up clients (sites such as Upwork or Toptal can help). You can then can use your off-hours to make some serious extra cash.

5. Rent or sell your stuff

On top of trading your time to make money, consider the stuff you currently possess to generate some additional income. Looking for items to sell, such as clothing, electronics, appliance, furniture or other valuable items that you don’t need or use anymore.

You might also consider renting out your items or space:

• Rent out your car through a car-sharing marketplace, like Turo or Getaround
• Rent your parking space or driveway through SpotHero or Spot
• Put a spare room or your home up for rent on Airbnb or VRBO

6. Sell your own goods

Borrowers with a creative streak might consider making things to sell. Think about things you like to make, and whether you could make a version of that that people would want to buy.

If you can paint or draw, for example, you could consider making commissioned family portraits. As a photographer, you can offer to do photo shoots or upload and sell your photos on stock sites, such as Foap. You can sell your own baked goods, handmade jewelry, hand-cut wooden cutting boards, or personalized leather wallets or billfolds.

Whatever you know how to make, start creating and offer your goods to people you know or consider listing them on sites like Etsy. Then you can turn around and use the proceeds to pay off debt.

7. Teach a skill to others

Another way to leverage your unique know-how to make money is to teach others through a course, class or one-on-one lesson. With just a few hours of teaching per week, you can generate a few hundred dollars per month to make extra debt payments.

If you can play a musical instrument or sing, for instance, you could teach private lessons. Exercise buffs could find work leading a fitness class or working as a personal trainer.

You can even share your skill set online. You might consider teaching English as a second language through QKids, or tutoring on a range of subjects through Brainfuse or Tutor.com. Or, you could create an online or video course and sell it on sites like Teachable or Udemy.

8. Make money with an app

Today’s gig and sharing economies rely on mobile apps to make it easier for enterprising smartphone owners to make money. You can make money with mobile apps such as TaskRabbit, which allows people to hire and pay you to complete small jobs or errands. GreenPal is an app to find jobs performing yard work and lawn care.

You can sign up as a driver and get paid for delivery food or groceries with DoorDash, Shipt or Instacart. And of course, there are ride-sharing apps, such as Lyft and Uber, that remain staples of side hustlers everywhere.

9. Provide care services

You can also provide care services to make some extra money to help pay off your debt. Sites like Sittercity, Care.com or UrbanSitter enable you to offer your services as a babysitter or child care provider. If you’re more of an animal lover, these sites also connect sitters with pet owners, or you can use an app such as Rover. You can also look for house sitting gigs on HouseSitter.com.

10. Start your own side business

Have the entrepreneurial bug? Starting a business as a side hustle is a smart way to ease into a company with fewer costs and risks.

Many of the ideas already listed could be a jumping-off point for starting a business. But don’t limit yourself. Think of several business ideas and test them on a small scale to see if they’re profitable. You’ll quickly see proof of concept and can narrow your business ideas down to one that’s profitable and viable.

You can work your regular job during the day, and build our own business during your off-hours. You’ll get a firsthand taste of what it’s like to be your own boss working on your own projects, all while making some extra money and getting out of debt.

What is debt consolidation?

Debt consolidation is when a consumer takes multiple debts and combines them by paying them off with one new loan or credit card, typically at a lower interest rate than the individual debts.

“It can be done a lot of different ways,” said Andrew Pizor, a staff attorney at the National Consumer Law Center. “Some people do [debt consolidation] with a mortgage, some people do it with an unsecured personal loan and some people do it through a credit card advance.”

Even though using your home to consolidate your debt is an option, Pizor said doing so is generally a bad idea because you’re taking unsecured debt and attaching it to an asset.

“If you don’t pay your credit card bill, the worse they can do is sue you,” he said. “But if you don’t pay your mortgage, they can take your house.”

One of the main reasons consumers consolidate their debts is to reduce the total amount of their monthly payments. But sometimes the monthly payment is lower because the term of the new loan is longer.

In that case, even if the interest rate is low, you could be paying more for the new debt in the long run. “[A lower monthly payment] can be important for an immediate need,” Pizor told MagnifyMoney. “But you really have to watch out for going from the frying pan to the fire.”

Consolidating debts can also streamline your finances and make things easier to manage since you will deal with fewer payments and fewer creditors. But Pizor said that alone should not be the primary reason to pursue debt consolidation.

Consumers who are considering debt consolidation should keep in mind that this strategy does not reduce the balances of your debt. It simply moves the debt to a new loan.

How does it work?

Consumers can use debt consolidation to pay off a variety of debts including:

• Credit cards
• Student loans
• Unsecured personal loans
• Business debt
• Medical bills
• Debts in collections
• Taxes

There are multiple ways consumers can consolidate their debts:

• Personal loan
• Credit card balance transfer
• Home equity loan
• Home equity line of credit (HELOC)
• Cash-out refinance on your mortgage
• 401(k) loan

Who is it useful for?

Since one of the perks in consolidating debt is to reduce the amount of interest paid along with lowering the monthly payment, consumers who qualify for a low rate on the new loan or credit card stand to benefit the most from this strategy.

Also consumers who can manage their payments on their own and are confident they will pay the new loan on time are good candidates for debt consolidation. It is not a good strategy if you are likely to run into trouble with the new loan.

How much does it cost?

Depending on what is used to consolidate the existing debt, costs can include a balance transfer fee, an origination fee, points, or an annual fee among other costs.

You can explore options using LendingTree’s personal loan tool. You’ll input some personal information before potentially seeing loan offers. From there, you can weigh the cost of your options. (Note that MagnifyMoney is owned by LendingTree.)

How long does it last?

The amount of time it will take to pay off the newly consolidated debt depends on what method is used for consolidation, the total amount of debt, and the size of your payments.

Consumers who use a personal loan to consolidate debt can expect their consolidation to last the term of the loan unless they pay it down faster.

When should you use it?

Again, debt consolidation is not a good strategy for consumers who have trouble paying their bills. But it can be advantageous for those looking to lower their payments and reduce the amount of interest they are paying.

What to watch out for

Debt consolidation comes with some potential pitfalls. Consumers should beware the following:

• Paying even more interest: If you take your no- or low-interest debts such as medical bills and consolidate them with your high-interest debts, you could potentially increase the total amount of interest you pay.
• Swapping a low payment for an extended loan term: You could be getting a lower monthly payment only because the new loan comes with a longer term, which increases the total amount paid towards the debt.
• Consolidating unsecured debt with secured debt: Again, if you pay off unsecured debt such as credit cards and medical bills with a home equity loan, HELOC or a cash-out refinance, you are putting your home at risk if up run into trouble paying the new loan.
• Running up your balances again: It is not uncommon for consumers who consolidate their loans to go deeper into debt by running up their balances again.
• Giving up your rights on federal debt: If you consolidate federal student loans, you will lose any protections and options associated with them.

What is credit counseling?

Credit counseling is the process of working one-on-one with a trained financial professional. Credit counselors can help consumers work through an immediate need or crisis or can provide a holistic look at their financial situation.

Credit counseling can offer guidance in the following areas:

• Establishing a budget
• Reviewing and understanding your credit report and credit scores
• Developing a plan to pay past-due bills
• Providing education and resources to help you manage your finances
• Helping you enter a debt management plan

How does it work?

Consumers who are interested in credit counseling would schedule an initial session. At that meeting, a counselor will take a look at your finances and determine your next steps, whether it’s to have additional sessions or to provide you with other resources.

A counselor may also recommend you enter a debt management plan, which is a program managed by the counselor to help you get (and stay) current with your creditors.

Credit counseling is offered by a variety of sources ranging from agencies to individuals. A few options include:

• National Foundation for Credit Counseling (NFCC)
• Financial Counseling Association of America
• Local community agencies
• Individual financial counselors or coaches

Who is it useful for?

“Credit counseling can provide very useful advice,” Pizor said. ”If you’re having trouble managing your money and you’re getting behind, it’s definitely worth talking to a counselor.”

Since credit counseling addresses a variety of needs, it can be a useful solution not only for those who are behind on their bills and need help but for those who are looking for education and resources on how to manage their money better.

How much does it cost?

There may be a cost associated with your counseling depending on your situation. Nonprofit credit counseling agencies are usually required to offer assistance regardless of a consumer’s ability to pay.

If your credit counselor suggests you enter a debt management program, there typically is a monthly fee associated with it, ranging from $25 to $35 at NFCC-affiliated agencies.

How long does it last?

Credit counseling can take place over one or several meetings based on your needs and financial situation. You and your counselor will discuss how many sessions you will need to have. If you enter a debt management plan, the average length is four to five years.

When should you use it?

Credit counseling can be helpful in the following situations:

• You are behind on your bills
• You have poor credit as a result of mismanaging your money
• You are overwhelmed by your financial situation
• You want to learn how to manage your money better

What to watch out for

When considering working with a credit counselor, keep the following in mind:

• Beware of disreputable companies: There are many trustworthy credit counseling agencies in both the for-profit and nonprofit sectors, but there also many that are not. Research any company you are considering working with thoroughly.
• Make sure the counseling agency is not pointing you toward a particular service: Some businesses might try to refer you to their debt consolidation partners or to get you to sign up for their debt management plan.
• High fees: Fees can differ from agency to agency, so be sure to compare costs.

Should you use a debt consolidation loan or credit counseling?

When considering which type of debt relief you should pursue, give some thought to your ultimate goals.

If you are looking for a one-time and immediate solution to paying your bills, debt consolidation may meet your needs. Keep in mind, though, that you will still be responsible for paying the new loan on time and consistently.

If you have multiple issues you want to address or are looking for long-term results and advice in managing your money, credit counseling is probably the solution for you. It can also help you work through an immediate crisis, but it is not an instant fix.

Pizor said it’s a good idea for consumers to consult a credit counselor even if they think they want to do debt consolidation or another type of debt relief.

If you decide you want to pursue one of these options, take the following steps.

Pursuing debt consolidation

1. Research your options: Look into the multiple ways you can consolidate your debt. Review what products your current bank offers, and also look at credit unions, community banks and online lenders.
2. Seek preapproval: Many lenders offer fast preapproval online.
3. Compare loan terms and select your loan: Review the rates and fees of all the options you researched. When looking at loans side-by-side, examine the APR to get the most accurate comparison Choose the loan or credit card with the most favorable terms.

Pursuing credit counseling

1. Research credit counselors: Pizor advised that consumers do their homework before deciding to work with a credit counseling agency. The U.S. Department of Justice also provides a list of approved credit counseling agencies.
2. Ask questions: To determine a credit counseling agency with which to work, the Federal Trade Commission suggests consumers ask questions about how their program works.
3. Consider the fees and other terms and choose a counselor: Compare the fees, as well as the terms of working with multiple credit counseling agencies, before moving forward with one.

Choosing your solution

Pizor stressed the importance of thoroughly assessing where you are and what your goals are before choosing any particular path. “Know your options and understand the situation before you give anyone any money,” he advised.

Regardless of the option you choose, remember that no debt relief solution will provide an instant or permanent fix. If you are attempting to solve or work through a crisis, make sure you take the precautions to avoid repeating the same mistakes in the future.

Like Chapter 13, Chapter 11 bankruptcy is a reorganization. Unlike Chapter 13, Chapter 11 is mainly for businesses and related to business debt.

“The filer can be a sole proprietor, S corporation, an LLC,” Robert W. Dremluk, a New York-based partner at the law firm Culhane Meadows, told MagnifyMoney. “Any format is okay, but the [filer] will primarily be addressing the business-related activities of the individual.”

While many business owners file a voluntary petition for Chapter 11, creditors can also file against a debtor, which turns it into an involuntary petition. Unlike Chapters 7 and 13 bankruptcy, there isn’t usually a trustee appointed at the start of a Chapter 11 filing. Instead, after filing, the business owner becomes the “debtor in possession” (DIP), allowing the debtor to retain control over the business assets during the term of the reorganization, which can take months or years to execute. This also allows them to make decisions about what to do with assets.

As an example, Dremluk mentioned a retailer who can choose to close underperforming stores and have a sale on the inventory but to continue operating successful locations.

Once a business owner has filed a petition for bankruptcy, an automatic stay is enacted, ensuring that collection activities, repossessions and foreclosures are suspended. In some cases, however — such as when the underlying property in question isn’t necessary for the reorganization or the owner has no equity in it — a creditor may request that the court lift the stay and allow them to foreclose.

While they are the debtor in possession, the business owner has 120 days to create and submit a plan for reorganization. The plan, which will outline how each class of claims (secured and unsecured) is to be handled, must then be filed with the court. A disclosure statement is then sent to creditors to allow them to evaluate the plan. Creditors who, according to the plan, will not get the full value of the debt they are owed or whose contracts are going to be modified under the reorganization, can vote against the plan.

When developing the plan, a business owner doesn’t go it alone. In addition to having their attorney to help, there is also a creditors committee comprised of representatives of the seven largest unsecured creditors. The committee helps to develop the plan and investigates the conduct of the business owner to help ensure proper management of assets.

Generally, a business owner’s personal assets are left out of a Chapter 11, but, as Dremluk noted, that’s not always the case. “Sometimes, an individual personally guarantees or pledges personal assets on behalf of the company, in a closely held company. An aggressive lender may call collateral, it depends,” he said. In addition, if the business is a sole proprietorship or a partnership, personal assets may be at risk.

When to consider filing Chapter 11

According to Dremluk, there are a number of events that can prompt a company to file for Chapter 11. In some cases, it could be due to the company facing financial difficulties or operational issues.

“Companies [sometimes] end up considering bankruptcy because they are in financial distress, and part of the reason for that may be that management is unable or unskilled in grappling with problems the company is facing,” said Dremluk. Whether the issue is that company management isn’t proficient at solving problems or that the company has overexpanded and isn’t able to correctly operate a business this large with their current structure, Dremluk said that bankruptcy gives them the opportunity to correct their course.

“Bankruptcy gives the business a chance for a pause and to reassess what they’re doing and how to do it better,“ he said.

What debt is erased in Chapter 11?

“Secured and unsecured debt whether public or private can be discharged,” said Dremluk. Unlike Chapter 7 bankruptcy, where unsecured creditors often walk away without receiving payment, Chapter 11 allows a business to set up a reorganization that pays creditors, although sometimes they receive less than the company owed them or the debt is paid over a longer period of time than the original contract specified. While secured creditors are prioritized in the reorganization, vendors who supply services and materials that are integral to the ongoing operation of the company (called “critical vendors”) may see their unsecured debt getting paid off during the bankruptcy.

What makes Chapter 11 so powerful is that it allows a company time to get their business on the right footing. With Chapter 11, said Dremlock, “[a] company can deal with asset/secured claims and sell assets over a period of time instead of in fire sale situation.”

The first step a filer should take is reaching out to an attorney; as Dremluk noted, it is mandatory that a business owner filing for Chapter 11 “must be represented by counsel.” In addition, because each district court may have its own added requirements, an attorney can ensure you file everything necessary.

Business debtors who wish to file will be utilizing a multitude of forms in the 200-series, beginning with Official Form 201, “Voluntary Petition for Non-Individuals Filing for Bankruptcy.”

Next, business owners need to compile a list of the names and addresses of all their creditors. This list should be formatted however the court in your district requires.

Another official form that needs to be completed is Form 204, “Chapter 11 Cases: List of Creditors Who Have the 20 Largest Unsecured Claims Against Debtor and Are Not Insiders.”

“The list of creditors is submitted to the court for purposes of selecting a potential creditors committee,” said Dremluk. “You don’t want people on that committee who are conflicted because they are an officer or shareholder.”

Finally, for those business owners required to file periodic reports with the Securities and Exchange Commission (SEC), Form 201A, “Attachment to Voluntary Petition for Non-Individuals Filing for Bankruptcy Under Chapter 11,” should be completed.

Within 14 days of filing Form 201, the debtor will need to file the rest of the forms for their bankruptcy, which are:

• Official Form 206, “Schedules of Assets and Liabilities”
• Official Form 206A/B, “Schedule A/B: Real and Personal Property”
• Official Form 206D, “Schedule D: Creditors Who Have Claims Secured by Property”
• Official Form 206E/F, “Schedule E/F: Creditors Who Have Unsecured Claims”
• Official Form 206G, “Schedule G: Executory Contracts and Unexpired Leases”
• Official Form 206H, “Schedule H: Codebtors”
• Official Form 206Sum, “Summary of Assets and Liabilities for Non-Individuals”
• Official Form 202–Declaration, “Declaration Under Penalty of Perjury for Non-Individual Debtors”
• Official Form 207, “Statement of Financial Affairs for Non-Individuals Filing for Bankruptcy”
• Director’s Form 2030 (unless your court requests otherwise), “ Disclosure of Compensation to Debtor’s Attorney”

If the business owner declaring Chapter 11 meets the criteria to be considered a small business debtor, they must also include a balance sheet, statement of operations, cash-flow statement and federal income tax return. If the small business owner doesn’t have these documents, they can submit a statement under penalty of perjury that they have not prepared the documents or filed a federal tax return.

To determine whether a filer is a small business debtor, the criteria they must meet involves two elements. First, it must be ensured that the debts are no more than $2,566,050, and the business cannot be focused primarily on owning or operating real property. Second, a creditors’ committee has either not been appointed to the case, or has not properly provided necessary oversight, as determined by the court.

When filing, business owners can expect to be charged a $1,167 filing fee and $550 as a miscellaneous administrative fee. On top of that, a debtor must pay attorney fees, which can get weighty.

“Chapter 11 has become too expensive for most companies to file, and lenders have also reached the point in their analysis where they don’t want to support a company for a long time. They’d rather have a company liquidate and take their losses,” said Dremluk, who added that fee arrangements and advanced budgets for attorney fees might help a filing company’s chances of success.

Within 120 days of petitioning the court for Chapter 11 bankruptcy, the company needs to submit its plan for reorganization. The plan will generally include provisions for how the reorganization will be implemented, including how business will continue, how funding will occur, how each class of creditor will be paid, the interest paid to them and so on.

One important aspect of the reorganization plan is that it needs to be in the best interest of creditors in order to get approved. “The plan needs to be in the best interest of creditors, so treatment of creditors under the plan must be better than they’d get in a liquidation,” said Dremluk.

Dremluk added that, ideally, through the reorganization “the company will be able to discharge debt, resolve claims and emerge with a cleaner balance sheet and a lot of its other issues behind it.” Small businesses can submit this plan on Form 425A, “Plan of Reorganization for Small Business Under Chapter 11,” along with the disclosure 425B, “Disclosure Statement for Small Business Under Chapter 11.”

Conclusion

The word bankruptcy conjures a lot of different feelings for people and very often those feelings are negative. But when it comes to a business filing Chapter 11, it’s hard not to see the positive potential in allowing that company the time and space to reorganize and find effective ways to deal with the problems that helped push it into financial distress.

Still, bankruptcy isn’t the right choice for every business owner, which is why it’s important to have an experienced attorney working on your case.

Borrowers who have defaulted on debts should keep an eye on the mailbox. Once a debt collector contacts you for the first time — usually via a phone call — they have five days by law to send you a debt validation letter. Sometimes this letter serves as the first communication from the collector. Its purpose is to make sure that the debt in question actually belongs to you.

The rules governing these letters are laid out in the Fair Debt Collection Practices Act (FDCPA), a federal law that defines the limitations on third-party debt collectors who are tasked with collecting debts on behalf of others. The act’s provisions on handling defaulted debt stipulate that debt collectors can’t use “any false, deceptive, or misleading representation or means in connection with the collection of any debt.” This means that they must have validation to support their requests for payment from a particular person. A debt validation letter is often called a “G notice” by those in the industry because the rules for it are laid out in section G of the FDCPA.

The rules are meant to protect consumers from errors caused by mistaken identity and identity theft. While identity theft is the more attention-catching issue, many errors also arise from mix-ups among people with common names — a particular problem with family names from certain cultural groups — and particular naming conventions, such as fathers and sons with Jr. and Sr. suffixes. Mistakes also occasionally occur in the amounts being collected and in record keeping indicating whether or not the debt has already been paid.

The debt valuation letter must contain the following information:

1. Name of the creditor
2. Amount to be collected
3. That the debtor has the right to dispute the debt, which must be done in writing within 30 days
4. That you can request the identity of the original creditor in writing within 30 days, if it’s different from the current creditor
5. That once you have disputed the letter in writing within 30 days, no further action can be taken to collect the debt until validation is provided

Item No. 4 on the list is a particularly important thing to understand when debt may be packaged and sold, repackaged and resold, ad infinitum. An example is a letter telling you that you owe a debt to “Midland Credit,” a company you’ve never heard of. Before you become alarmed that there’s been a mistake, request the name of the original creditor from the debt collector. They might inform you that Midland Credit is actually a Capital One card, which will clear up your confusion. It’s important to realize that no collection activity can go forward until they supply that information in response to your request, providing you a reprieve until all uncertainty is cleared up.

How to request a debt validation letter

Debt collectors must send out your debt validation letter within five days of the first time they contact you. This means that you should receive it a few days after that, unless if the debt collector has an incorrect address for you, it may take longer for the letter to get to you (if it arrives at all).

If you don’t receive the letter when you expect it, you still have the right to dispute the debt in question. Imagine you get a phone call from a debt collector, then two weeks go by without a letter arriving in your mailbox. Your best step to take at this point is to call the debt collector and request the letter.

In many instances, the problem is that they are using an old address for you. If that is the case, the debt collector will likely ask to verify your address over the phone. Some debtors who aren’t prepared to deal with the debt may hesitate to verify their address. Certainly no one can force you to provide your current address to the collector, but withholding it can negatively impact you down the line when you’re finally forced to account for the debt.

“Some people feel they don’t want to give their address and be harassed,” said Joshua Cohen, a consumer protection attorney at Cohen Consumer Law. “If that’s how you feel, then you should go to a consumer attorney to know all your rights. There’s nothing worse than going in front of a judge and saying, ‘I didn’t get my letter.’ And then having the collector say, ‘We didn’t have the right address and he wouldn’t verify the address.’”

Keep in mind that it’s good practice not to supply any personal information over the phone until you have verified that the party you’re talking to is a legitimate debt collector.

Responding to a debt validation letter

If you would like to ask for validation of the debt after receiving a debt validation letter, it’s a good idea to use a template to make sure you’re expressing yourself clearly in a way the debt collectors will understand. Send the letter to the debt collector at the address provided in the debt validation letter. There are many templates for such letters available online, including some by the Consumer Financial Protection Bureau (CFPB).

The letter you write will depend on your response to the debt validation letter. For instance, you will write a different letter if you believe the debt is not yours versus if you simply need more information before you can figure that out. If you believe the debt is not yours, though, remember that debts are bought and sold, so the fact that you don’t recognize the creditor’s name does not mean there has been a mistake. It’s best to find out all information possible before you conclude that you’re being held responsible for someone else’s debt.

The CFPB advises that you make sure to find out all of the following information, some of which should be provided in your debt validation letter and some of which you may have to ask for in your response:

• The name and contact information of the debt collector
• The total debt amount, including any fees such as interest
• The reason for the debt and the date it originated
• The identity of the original creditor
• Any information the collector is using to justify their conclusion that it is you who owns the debt

It is a good idea to keep a copy of this letter and to send it via certified mail with a return receipt, so you have a paper trail of your communication with the debt collector.

What happens after you’ve sent a validation request?

Once you’ve sent your validation request, the debt collector does not have a deadline to respond. It’s a common misunderstanding that the collector only has 30 days to respond to a validation request, but in truth, they can take as long as they want. That open-ended time frame is a benefit for debtors since the debt collector can’t contact you during the period that they’re working to validate the debt.

“If they take six months to validate, that’s six months they can’t bother you,” said Cohen. “The only thing they’re allowed to do is to say, ‘We’re not collecting this debt anymore.’”

Relinquishing the debt collection altogether does indeed happen. As a general rule, if the debt collector doesn’t respond to the validation request within 90 days, then you’ll likely never hear from them again.

If they do respond, they will provide some amount of information, but often not as much as the debtor wants or has asked for. Unfortunately, the debt collector is not required under the FDCPA to send the debtor a full accounting of the debt, the promissory note or the full agreement.

Many consumers assume that debt in collection cannot go forward unless the debt collector can provide the promissory note, but that is not the case. The debt collector is permitted to submit validation of the debt that basically amounts to a statement from the creditor saying you, the debtor, owe the amount in question.

Once the debt collector has responded to your request for information, they are allowed to resume collection efforts. If you still doubt whether the debt is yours upon receiving whatever information the debt collector provides, you can take action to try to clear up the confusion. If the debt collector can’t provide proof, you can try calling the creditor directly at the contact number provided on your credit report. There are times that a debt collector will decide not to pursue your debt at this point, or they may keep pursuing it until you can definitively prove it’s not yours.

“Debt collectors want to do their job the right way,” said Cohen. “Despite what people think, they want to do it the right way. The more proof you send about the debt not being yours, the better they can do their job and talk to the creditor about not making you pay the note.”

However, if you aren’t able to get this proof and you feel confident the debt isn’t yours — whether you’ve been a victim of identity theft or there’s been a mistake — you should go to a consumer attorney. You can dispute the debt with the creditor and with the credit reporting agencies, which an attorney can help you with. The problem may resolve itself, but if it doesn’t, you’ll probably have to proceed to litigation.

“If the debt isn’t legitimate, the debt collector is the least of your problems,” noted Cohen.

Conclusion

Debt validation letters bring a sense of order to the process of debt collection and provide important protections for those who are being asked to pay large sums by debt collectors.

Those who owe a debt but can’t pay will need to deal with that fact sooner or later; the receipt of a debt validation letter may be a good motivator to contact a consumer attorney to understand your options. Looking to an attorney is also a good idea if you’re being pursued for a debt you’re certain isn’t yours. The debt validation letter will be one of the first indications that something fishy is going on.