(MONEY Magazine) – THE TRONOLONES OF AURORA, ILL. (pictured above) and the Dorans of Chandler, Ariz. (above right) seem to be typically prosperous American families. Both are headed by two-career couples who bring in between $86,000 and $90,000 a year; both have four kids; both own their own homes and a couple of cars. The key difference between the two clans: Richard and Cathy Tronolone, 33 and 39, are drowning in debt totaling $284,000, including an $81,000 mortgage and $83,000 in credit-card balances. Chris and Pat Doran, 51 and 54, by contrast, are staying afloat nicely despite $126,000 of debt: While they borrowed liberally in recent years, they've since made smart moves like refinancing a high-rate mortgage and moving high-rate credit-card balances to cheaper cards.

Whether you identify more with the Tronolones or the Dorans, you've probably become increasingly concerned about debt lately. From personal-finance talk shows to newspaper headlines, binge borrowing has become America's latest bugaboo, blamed for everything from last year's lousy Christmas sales to this year's potential recession. In this story, we'll show you how to determine whether you owe too much--like the Tronolones do--and how to emerge from the red no matter what you owe, as the Dorans are managing to do.

To accurately assess Americans' indebtedness, we interviewed more than five dozen economists, financial planners, academic researchers, banking executives, debt counselors and consumers. Our findings:

We are borrowing at a record pace. While consumer installment debt as a percentage of total income has been higher before--for instance, in pre-recessionary 1989--in sheer dollars, Americans owe more money now than ever. Consider that installment debt, including auto loans and credit-card balances, recently topped a record $1 trillion--a full one-third increase in just the past two years. Late payments on credit cards reached 3.3% last year, the second highest delinquency rate in a decade. And home mortgage delinquencies hit a two-year high in the third quarter of 1995, the last period for which figures are available. In fact, over the past 10 years, as mean incomes stagnated, total household debt, including mortgages, has soared from equaling 80% of annual disposable income to 93%.

Economic changes have made it harder for us to avoid debt. Forty years ago, when the Great Depression was still fresh in many minds, Americans assiduously avoided debt. In the early 1950s, for example, equity as a percentage of total home value averaged 85%, vs. less than 60% today. But fundamental changes in the U.S. economy--in particular, the trend toward corporate downsizing and mass layoffs--have contributed to a loss of real consumer buying power. Last year, for instance, U.S. wages and benefits increased by the smallest amount in 15 years. The result: Americans increasingly rely on borrowed money to maintain their standard of living, a habit made easier by the heated competition among credit-card issuers and other lenders to snare new customers.

As a result, people at all income levels are overextended. Low-income folks registered the largest increase in average household debt from 1990 to 1995, according to the Arlington, Va. financial market research firm Claritas. Debt among those earning between $15,000 and $20,000 a year jumped 66% in that period, to $10,330. Meanwhile, families earning between $100,000 and $125,000 a year saw their total indebtedness rise an also alarming 26% over the same period, to $154,550, and those earning more than $125,000 saw their debt rise 29%, to $192,017. "These days our clients include doctors, lawyers, accountants and any other profession you can think of," says Durant Abernethy, president of the National Foundation for Consumer Credit, an umbrella group for 1,200 nonprofit consumer credit counseling offices.

Of course, higher-income borrowers stand a better chance than their poorer neighbors of digging out from under, especially if their debt is backed by appreciating assets such as a home. But credit-card advances, unsecured loans and their ilk are bad news for almost everyone, burdening consumers with high interest rates and often siphoning away savings. What's more, our national spending spree leaves many families poised for disaster if the economy takes a significant dip. "If we slip into recession," says Daniel Laufenberg, chief U.S. economist for American Express Financial Advisors in Minneapolis, "incomes will stagnate or fall--and a lot of people will no longer be able to make their payments."

To be sure, not everyone has a debt problem. To figure out whether you do, first calculate your debt-to-income ratio (use the worksheet on the next page). This figure represents the percentage of your total after-tax income that goes to pay your nonmortgage debts each month. Most financial planners say that, depending upon your stage in life, monthly debt payments for everything but your mortgage should not exceed 10% to 15% of your take-home pay. If you're shelling out 20% or more, you're well into the danger zone. (The Tronolones' ratio: 75%, vs. 17% for the average American.)

Even if your worksheet totals look reassuring, don't celebrate until you consult the checklist on page 165. If two or more of the situations listed apply to you, you've likely got a problem, no matter what the numbers seem to say. For instance, an inability to save at least 10% of your pretax income is a bad sign.

No matter how much you owe, the following advice can help you lighten your load and keep you from getting weighed down again.

Focus on paying down high-rate debt first. Take stock of all your outstanding loans, organizing them from highest to lowest interest rate. Your list might look like this: credit cards (average rate: about 18% recently), unsecured loans from banks or credit unions (14%), auto loans (10%), student loans (8% to 10%), home-equity lines of credit, or HELs (8% to 10%) and mortgages (7.25%). (The tax deductibility of HELs and mortgage loans makes them even cheaper, lowering their after-tax effective interest rate by as much as 2.5 percentage points for a family in the 28% tax bracket.) Once you've amassed an emergency fund equal to three to six months' take-home pay, says Bloomington, Minn. financial adviser Robert Steffen, put as much money as you can toward retiring any debt that carries a rate of more than 8%. "Despite today's hot stock market, over time any investment you can make is unlikely to beat the effective return you get when you pay off high-rate debt," explains Bob Hammond, author of Life Without Debt (Career Press, $14.99).

Consider refinancing. If you have a hefty mortgage, you may have one thing to be grateful about: today's super-low rates could well mean you can save a bundle by refinancing. In the past 15 months, the average rate on the most common mortgage loan, the 30-year fixed rate, has fallen from 9.2% to a recent 7.4%. That's close to the 28-year low of 6.8% in 1993. Refinancing can produce impressive savings, as Chris and Pat Doran's experience shows. Two years ago, after architect Chris lost his $60,000 job, the Dorans were struggling to make monthly mortgage payments of $1,010, including a first mortgage on their four-bedroom house in Phoenix (interest rate: 10%) and a second $10,000 mortgage used to build a swimming pool (12%). The couple refinanced both mortgages to a single one at 7.5% with a mere $740 monthly payment, a snap for the couple to pay since Chris found a new $56,000 job last fall. Says Pat, a $30,000-a-year librarian: "I feel like we're finally in control."

Before you join the refi rush, however, compare the amount you'll save in payments to your refinancing costs, typically around 3% to 5% of the mortgage amount. Rule of thumb: If you'll get back those costs within three or four years and plan to stay in your home for at least one year after that, refinancing is probably worth it. If you're so strapped for cash that you can't come up with a few thousand dollars in closing costs, fear not. These days, many lenders will waive those fees if you agree to pay a rate that's five- to seven-eighths of a percentage point higher. With such a no-fee loan, refinancing pays so long as the new interest rate is simply lower than your current one.

Consolidate. Lower your debt payments by combining several high-interest loans into one with a lower rate. If you're a homeowner, your best bet is probably a HEL. If your credit-card balances total, say, $10,000, you can save more than $2,000 in interest payments over five years by consolidating into a HEL at 8%. Because interest on HEL balances of as much as $100,000 is tax deductible, your final after-tax savings can total $3,700 or so for a family in the 28% tax bracket.

Student loan borrowers, especially the 2 million or so already in default, should explore one of the many consolidation options available through governmental and private lenders. Typically, you can combine all your existing federal school borrowing into one loan, with an interest rate ranging from 8% to 9%--lower than many outstanding student loans, which can go as high as 10%. Generally, these programs let you choose between several repayment periods ranging from 10 to 30 years. The longer the term you choose, the smaller your monthly payments, but the more you'll pay in interest. Go ahead and take a long term, if you must: As your financial situation improves, lenders will let you switch to a shorter repayment schedule at no cost. For more information, call the Department of Education (800-455-5889), the Student Loan Marketing Association (known as Sallie Mae; 800-643-0040) and the New England Education Loan Marketing Corporation (Nellie Mae; 800-634-9308).

Negotiate with lenders. MONEY readers have heard this tune before, but it's worth another chorus. You'd be surprised how easy it is to wrangle more borrower-friendly terms from lenders today. "Most banks and card issuers would rather lower your interest rate or slash fees than lose you as a customer," says Edward F. Mrkvicka Jr., author of The Bank Book: How to Revoke Your Bank's "License to Steal" and Save up to $100,000 (HarperCollins, $12). "That goes for credit cards, mortgages, even car loans."

If you're paying the going rate for credit-card debt, call your card issuer and threaten to switch to a lower-rate competitor. Your issuer won't budge? Go ahead and switch. That's what the Dorans did: In late 1993, they began moving $16,000 worth of credit-card debt, with interest charges ranging from 16% to 21%, to new cards with low rates of 9% to 12%. The switch saved them more than $1,000 a year in finance charges. Recently, 18 banks offered cards that charge interest rates of less than 10%; get a list of them for $4 by writing to the Bankcard Holders of America (524 Branch Dr., Salem, Va. 24153).

Mortgage lenders are especially willing to work with borrowers, in large part because they don't want to be forced to write off big home loans. If you're having trouble making your mortgage payments, call your banker and 'fess up, stressing whatever reasonable excuses you have--say, you've recently been laid off or incurred unforeseen medical bills. Says William Redman, senior vice president of retail credit at EAB Bank in Uniondale, N.Y.: "If you call them before they have to call you, you have a lot more flexibility." Many mortgage lenders will forgo interest charges if they believe that you intend to resume your old payment schedule as soon as possible. Similarly, some lenders will allow you to pay only interest charges for a few months.

Borrow creatively, but carefully. If you can't consolidate your existing debt with a HEL, consider paying off high-rate loans with money you've borrowed from other cheap sources. However, be certain that you understand the risks involved. "Sometimes it's a good idea to borrow from Peter to pay Paul," says Robin Leonard, author of Money Troubles: Legal Strategies to Cope with Your Debts (Nolo Press, $18.95), "but it depends on who Peter is." Here are four options, from least to most risky:

Loans from family or friends. These can be great deals if you avoid the temptation to view such loans as casual, open-ended lines of credit. "Treat a loan from a relative or friend as you would any business loan," advises Baltimore financial planner Jay Perry. If you pay interest and draw up a formal note on your loan (you can find samples at most office-supply stores), you're less likely to ruin a treasured relationship.

Margin loans. Such loans are issued by your brokerage firm, using your investment portfolio as collateral; interest rates ranged from 8% to 10% recently. Typically, you can borrow as much as 50% of the value of your stockholdings and around 90% of the value of any U.S. Treasury securities you may own. However, margin loans can be risky. If you take the maximum loan and the value of your collateral falls 10% (for government securities) or 30% (for stocks and corporate bonds), you may receive a so-called margin call from your broker that obligates you to fork over additional cash or securities to cover the shortfall, or the brokerage may sell off your holdings to cover losses. Your best strategy is to borrow no more than 20% of the value of your portfolio. In that case, your portfolio would have to lose a whopping two-thirds of its value before you'd be required to kick in more cash. For a more detailed explanation of how margin calls work, consult your broker.

Loans against the cash value of your life insurance policy. Most insurers charge very competitive rates, usually between 6% and 8%, and they'll let you borrow up to the full cash value of the policy. And you need not even pay the loan back. This option is best for individuals whose beneficiaries aren't counting on the death benefit to live on. Reason: If you die with an outstanding loan balance, your beneficiaries will receive the policy's face value minus the amount you still owe.

Loans from your 401(k). Interest rates on loans from these employer-provided retirement plans generally range from 8% to 9%--and better still, you're essentially paying the interest to yourself. Such a loan is appropriate only if you can pay it back within five years (10 to 30 years if you borrowed to buy a primary residence) and if your job is secure. That's because if you don't repay within the time limit, Uncle Sam will view your outstanding balance as a withdrawal, and you'll owe income taxes and a 10% penalty if you're younger than 591/2. Likewise, if you quit or lose your job before your loan is repaid, you have 30 days to pay the balance before the tax bill kicks in. Another drawback: If the interest rate you're paying on the 401(k) loan is less than the rate of return your dollars would have earned in, say, the plan's stock investments, you could end up with less money in retirement than you counted on.

Seek help when you need it. If you're truly in dire straits, call the nonprofit Consumer Credit Counseling Service (800-388-2227). Some of CCCS' 1,200 national offices will counsel for free, but most charge about $9 a month to help you plan a budget, trim your expenses and negotiate with creditors to lower your monthly payments. Richard and Cathy Tronolone got in touch with the CCCS office in Wheaton, Ill. this past November and consider it money well spent. "We're amazed at how helpful our counselors have been," says Richard, a chiropractor whose family had amassed $83,000 in credit-card bills in the early 1990s while he was building his practice. The CCCS counselor negotiated with the family's 18 credit-card issuers to lower their rates, in some cases succeeding in eliminating interest payments entirely. "The plan we worked out will have all our credit-card debt paid back in about four years," says Richard, who earned $64,000 from his practice last year, on top of Cathy's $26,000 nurse's salary. "It's a long tunnel, but at least we can see the light at the end."

Lettering by Anita Karl