A company's value equals the sum of its equity and debt. Theoritically, a company can increase its value by raising more equity, or incurring more debt. Further, as per one of the theories of Finance,  capital structure does not matter; in other words a company can have less equity and more debt and have the same valuation!

However, having too much debt is a bad thing, because if the company can't pay its short-term debts, it can go under. Having too much debt is known as debt overhang. If 60% of a company's valuation is through debt, the company typically has a debt overhang problem. The debt overhang threshhold varies from industry to industry, in general.

The recent bankruptcy of Lehman Brothers (September 2008) and bailouts of Bear Stearns (a big investment bank), AIG (The biggest insurance group), Freddie Mac, and Fannie May by the Federal Reserrve and / or the US Treasury highlights how big a problem debt overhang can be for any business, and why it should always be measured and kept under control.

Debt overhang is a business concept. However, it can become a Damocles' Sword and hang over consumers, especially home owners who do not put enough equity as a down-payment. The current carnage in the US housing market at the time of writing (early 2009) is nothing but debt overhang which is the primary cause of accelerating foreclosure rates throughout America --- our recently published podcast explains this well.