When Calculating Debt-to-Income Ratio, What Is Considered Unsecured Debt?

The debt-to-income ratio is one of the most important financial ratios when applying for additional debt. When buyers apply for a mortgage to buy property, lenders take a close look at the ratio. Businesses must also provide debt to income ratio information when they apply for a loan. A key part of this ratio is unsecured debt, a measure of the specific debts that the applicant holds. If individuals known their income and expenses well enough, they can judge their debt-to-income ratio themselves before applying for credit.

Debt-to-Income Ratio

The debt-to-income ratio is a comparison of the total income the individual receives per month with all fixed expenses the individual must pay per month. The income is measured as gross income, including wages, interest and all other payments received before applying reductions from taxes and other sources. Fixed expenses include typical debts that a homeowner must pay, but typically not utilities or grocery bills. This provides a percentage of monthly income that is used to pay for debts.

Unsecured Debt

Unsecured debt is a term used to described debts that are not backed by collateral, or an asset with intrinsic value that a lender can claim if the debt obligation is not fulfilled. Debts like mortgages and car loans are secured. Unsecured debts included in debt to income ratios are often credit card accounts or alimony payments. Both types of debt must be included in the ratio for it to be accurate, but unsecured debts tend to be lines of a credit that operate more on a month-to-month basis, and are vital to include.

Fixed Expenses Specifics

The purpose of fixed expenses is to get a good idea of the monthly debts that must be paid. This means that unsecured debts are often more important than secured debts in the ratio. Secured debts tend to be for a specific duration, such as several years for a car loan. If the car loan is near being paid off, it should not be counted as a fixed expense, because the debt will not be recurring in the long term. A credit card debt, however, is a long term line of credit heavily associated with monthly payments and is often part of fixed expenses.

Healthy Debt to Income Ratios

There is no single rule for a healthy debt-to-income ratio. Some lenders prefer a ratio as low as 10 percent before considering making a loan, while others will accept a ratio as high as 30 percent. Typically, ratios approaching 40 to 50 percent are too high for any lender. In this case, unsecured debt is often the easiest type of debt to close or pay off, reducing the ratio and making it easier to qualify for further loans.

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How to Validate Debt After 30 Days

Debt validation is an important tool in avoiding a lawsuit from a collection agency over a debt. Lack of proper validation gives you grounds to have the debt removed from your credit report and successfully fight a lawsuit, should one be levied against you. The Fair Debt Collection Practices Act (FDCPA) allows consumers to request a debt validation at any time. You are only allowed to request debt validation from a third party debt collector. If your debt is still owned by the original creditor, even if it has been assigned to the collections department, debt validation cannot help you.

Instructions

1

Disregard the notice on your credit report giving you 30 days to dispute the debt before the debt will be considered valid. This does not mean that the debt will be considered valid by the credit bureaus and the courts if you do not file a timely dispute. It simply means that the collection agency will wait 30 days for a response from you and if one does not arrive, the agency will assume that the debt is valid and begin collection activity in earnest. You may legally dispute a debt at any time.

2

Type up your debt validation letter. In your letter, request written proof that the debt belongs to you, the name of the original creditor, and proof that the collection agency is licensed to collect in your state. Do not state that you are refusing to pay the debt. This will be interpreted as acknowledgment that the debt belongs to you and kept in a file to be used in court if the collection agency ever decides to sue you.

3

Avoid including identifying information such as your Social Security number or signature in your debt validation letter. Collection agencies commonly have no information on a debtor outside of the debtor's name and address. Any information you volunteer that the collection agency does not already have will be used to validate the debt--whether it is yours or not. Including a signature is particularly dangerous, since signatures can easily be moved to other documents.

4

Send your validation letter by Certified Mail: Return Receipt Requested. You will be asked to fill out a small green card with your name and address. The recipient will have to sign for the letter. The signature and date are recorded on the card, which is then sent back to you. Keep your receipt as proof that your debt validation letter was delivered in the event you do not receive a response.

5

Wait for a response. According to the FDCPA, a collection agency must validate your debt before resuming collection activity. Collection activity includes, but is not limited to: sending letters, calling you on the telephone, and updating your credit file.

6

Evaluate the validation if and when it arrives. The majority of collection agencies will simply mail you a printout containing your name and the amount of the debt. This does not constitute validation, since any name and amount may be typed out and mailed to a debtor. If this occurs, you must send a second validation letter requesting proper proof in the form of copies of your signed contract with the original creditor, or the collection agency's contract with the original creditor to collect on the debt.

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How to Accrue Debt

Debt in the form of a mortgage, auto loan, credit card or personal loan affects more people than you may think. Dealing with debt affects your daily financial decisions and long-term financial plans. Debt often costs more than just the amount you've spent. Add on the interest, late fees or penalties and your simple spending becomes a financial nightmare. Accruing debt can happen quickly. There are several ways to accrue debt, and each one is fairly simple.

Instructions

1

Get a credit card. Use it to spend more money than you make and never pay it off in full at the end of the billing cycle. Carry a balance so your interest charges increase and pay only the minimum amount due.

2

Take out payday loans or advances on your paycheck. Unless you know you can absolutely pay the loan off when it is due and keep your bank balance positive, this is a sure way to accrue debt. You'll be charged a high percentage in interest and the total amount due on the loan is taken out of your next paycheck.

3

Buy a car or home using a bank loan instead of cash. You will make monthly payments for the life of the loan, along with the interest your bank charges you.

4

Use a high-interest-rate student loan to fund your education. While you are in school it may seem like the best way to pay for your school, but soon after you graduate you are expected to make payments on the loan, including interest.

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Help With Bankrutpcy and Debt

Lots of people get in over their heads. Many times it's the result of a series of poor decisions or because a business fails. Other times it's due to circumstances beyond the debtor's control. Regardless of the reason, debt problems can wreak havoc on your finances, your emotions and even your marriage and family. Fortunately, there are resources that can help you deal with your debt problems.

Credit Repair Organization Act

Congress passed the Credit Repair Organization Actin 1996 to ensure individuals receive accurate information from credit counseling and repair organizations about the nature of the counseling organization's business. Credit repair organizations are not allowed to suggest that they will erase legitimate credit information or start a new credit file for you. They are also prohibited from charging a fee until they have rendered all promised services.

Credit Counseling Services

Credit counseling services can be for profit or nonprofit. They frequently provide confidential counseling and advice on budgeting and help you negotiate a favorable settlement with creditors. On occasion, they negotiate on your behalf, and provide you with a consolidation loan to help lower your payments, lower your interest, or pay down your debt faster. Do your homework before committing to one of these organizations (see Resources).

Financial Planners

Many financial planners provide confidential help with budgeting and advice. Some charge commissions on purchases of financial products, while others charge a flat rate or hourly fee. A skilled financial planner provide a great deal of perspective to your financial habits and help you address the root causes of your debt.

Bankruptcy

Bankruptcy is the court-supervised process of liquidating or reorganizing an individual's or business's assets in order to satisfy the claims of creditors. Chapter 7 governs liquidation and discharge, and Chapter 13 governs reorganizing an individual's assets and working out a payment plan. If the situation is hopeless, you may be able to get relief under the bankruptcy code and have some or all of your debt discharged. Not all debts are able to be discharged in bankruptcy, though. Bankruptcy can have serious long-term effects on your credit and even your career. Consult an experienced bankruptcy attorney before you file to learn how bankruptcy may apply in your specific situation.

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Must I Be Notified If an Earnings Arrest Is in Place?

An earnings arrestment is a debt-recovery tool that creditors may use to obtain payment from debtors in the United Kingdom. It bears similarities to wage garnishment in the United States; the creditor contacts the debtor's employer to have a portion of his earnings withheld for repayment of the debt. Although the creditor must notify the employer, it does not have to notify you.

Notification

After securing the proper authorization from the court, the creditor provides your employer with an earnings arrestment order, which legally requires the employer to withhold a portion of your wages and send the funds directly to the court for payment toward the debt. The employer will typically notify you if it receives such an oOrder, but it is not legally obligated to do so.

Length of Earnings Arrestment

Once your employer has received an earnings arrestment order, it must advise the court whether you are paid weekly, biweekly or monthly, and must divulge the date of your next payday. It must also tell the court how much it will deduct from your next paycheck, and how it arrived at that amount. Once the employer complies with the order, the arrestment continues until the debt and any court costs are paid. There is no set time limit for an arrestment order.

Earnings Arrestment Amount

The amount that the employer must deduct from your wages is mandated by the Debtor's Act of 1987. This act establishes tables that state the required withholding amount based on your income bracket.

Considerations

An employer that does not comply with an earnings arrestment order may be liable for all amounts that it should have withheld from your earnings. Also, an employer can legally terminate you if you are subject to an earnings arrestment.

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Grants to Help Debt Relief

Though many websites advertise that consumers can apply for governmental grants specifically for "debt relief," the claim is not true. There is no specific federal program which provides a lump sum payment to a consumer to rid herself of debt. Notwithstanding, there are numerous, government-funded programs that can help a debt-burdened consumer.

Credit Counseling Agencies and Debt Reduction Firms

Is cash flow a problem?

There are government-subsidized, non-profit counseling services, both state and private, which provide assistance to debtors for free. Such counseling enables consumers to negotiate less burdensome repayment schedules with their creditors.

A debt reduction company, however, will charge a fee for services rendered. Primarily, debt relief is accomplished through renegotiation of interest rates directly with a client's creditors, often reducing both his monthly payments as well as his long-term costs.

Government Grants

Don't let your loans become liens.

The U.S. Government features a web site featuring grants in three categories: government benefits, student loans and small business start-up loans.

Clicking "Benefits" brings up more than 20 targets, though none are titled, "Debt Relief." However, choosing Loan/Loan Repayment will link you to numerous programs, which are categorized as follows:

Mortgage insurance and loan guarantees: 6

Small business loans: 7

Repaying research loans: 8

Disaster loans: 4

Education loan consolidation: 1

Farm loans: 3

Grants to needy students: 1

Grants to fisheries:1

Hope for Homeowners (refinancing in lieu of foreclosure): 1

Health service loan repayments: 4

Home loans to Native Americans: 1

Student loans for parents: 1

VA loans:5

Maybe not cash in your pocket, but all are designed to reduce your cost of living.

Searching for Benefits

Help from Washington?

Another federal website featuring government benefits prompts visitors to complete a questionnaire, formulated to determine potential eligibility. For instance, entering the profile of a single, middle-aged male without minor dependents with a household income below the poverty level yields about 50 assistance programs, including grants, loan guarantees and fellowships.

Low-income parents with small children can anticipate over a hundred options from which to seek assistance.

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How to Find Out How My Social Security Number Was Used

Your social security number is private information and must be safeguarded in all situations. The nine-digit number uniquely identifies American citizens and others lawfully permitted to work or attend school in the United States. A person with malicious intentions can obtain your social security number and steal your identity for the purposes of material gain, making you personally liable. Safeguard your identity by keeping your social security number private and by periodically checking how the number is being used.

Instructions

1

Call the Social Security Administration at 1-800-772-1213 and ask them to review your employer earnings on file. Alternatively, review your Social Security Statement (Form SSA-7005) and verify the listed earnings are correct. If someone has used your social security number to obtain a job, the earnings on your statement will be inconsistent.

2

Call one of the three national credit reporting agencies, TransUnion, Equifax or Experian, and initiate a "fraud alert." By law, the agency you contact will inform the other two of the alert, according to the Federal Trade Commission.

3

Order a credit report from all of the national credit reporting agencies. It's possible that one agency will have data the others do not. Obtaining a report from all three delivers a complete set of data.

4

Review your credit reports for accuracy. Pay close attention to the accounts section and verify that you are responsible for all credit accounts, collections and credit checks.

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