How to Deal With Family Debts

Whether it’s a son at college who has racked up credit card debts way beyond his ability to re-pay, a spouse who has just come clean about a secret “affair” with a credit card, or over-extended parents or kids stuck with a mortgage they can no longer afford… more and more of us find ourselves struggling to figure out how to cope with debts in the family.

As best you can, try to avoid the temptation to play Monday morning quarterback, pointing out to your loved one all the things s/he did wrong. Instead, if you possibly can, thank them for letting you know about the problem and giving you the opportunity to help. Communication is key, and even if you don’t want to – or can’t – hand over cold, hard cash, finding other ways to help out and keeping the lines of communication open are crucial.

Far too often, people are in denial about how serious their debt problems are, and they don’t cop to them until the bills have really piled up. By that time, only the wealthiest of us can bail them out. With today’s credit crunch and grim economic forecast, all it takes is one lay-off or medical crisis to push people over the edge, from making ends meet to financial emergency.

Invest Your Time

While you may not be able to cut a check to pay down a family member’s debt, you probably can invest the time to get that person on the right track. Doing a little research and accompanying your loved one as s/he begins to find a solution can be a huge help. Too often people panic, and when they hear, “Sorry, I can’t afford to lend you any (more) money,” they feel hopeless, as though there’s nothing you can do to help them. But that’s not so! While there’s a lot of merit to the notion that people need solve their own problems, a little help along the way can go a looooooooooong way.

Sometimes, all it takes is some kind words of encouragement (“I wanna hold your hand”) and a willingness to sit down with your loved one at the computer to go over some budgeting basics or help him or her sort through debt consolidation options.

If the Problem Is More Serious

If it’s something that won’t be solved by some obvious prioritizing, cost cutting, and consolidating, how about suggesting a free, private debt consultation with Credit.com’s pros? You can help your loved one fill out the brief online form and then consider the choices that are outlined. One possible recommendation is credit counseling from a local non-profit.

• If the issue is chronic over-spending, you may want to cruise on over to Debtor’s Anonymous (D.A.), which has adapted the 12-step program that has been so effective for alcoholics. It’s easy to scout out nearby meetings.
• If the issue is financial infidelity, take heart. It’s better that you now know than not know. This problem is rampant, and there is help available. Click here to get started. If there is a divorce in the cards, be sure to read Credit.com’s Divorce Survival Guide.
• If the issue is helping your child with student loans or credit card bills, think long and hard before you decide whether or not to help, assuming you can afford to help in the first place! Incurring serious debts early in life can haunt a young person for decades; so getting them started on the path to financial solvency is well worth considering. For the current state of the student loan maze, click here.
• If the need for more income is the issue, you can brainstorm new or additional employment ideas. A visit to Craigslist is an easy way to get a feel for what jobs and gigs are available in your relative’s community. Consider whether or not to share some tips on starting a small business.

While you may have no intention or ability to invest in such a venture, there’s a lot to be said for taking the next step with your loved one. For example, you can commit to weekly “sessions” to help pinpoint the best opportunity for bringing in some extra dough. Or you can certainly go along to the first credit-counseling meeting, and if the D.A. meeting is “open,” you can go to that one as well.

A Quick Call May Be All It Takes to Get Someone Going

Call 211 – or keep your debt-ridden relation company while s/he does the dialing. This 24/7-referral service, set up by United Way, can clue you in on local resources that are available to help with all sorts of problems, including some very specific money troubles – for example, how to pay the rent or the fuel bill. Be as clear as you can about the problem.

For family members who live in other parts of the country, you can also visit the 211 website to find out about services close to where your loved one lives. (While most of the US is now covered, unfortunately 211 is not yet operational in every state.)

Should You Help Out with Money?

The way you respond, whether your answer is yes or no, will have a lot to do with determining the eventual outcome for the whole family. As I’ve already indicated, there are lots of ways to help that won’t cost you a dime. So please, do not even consider lending money that you might need. In fact, unless you can truly afford to never get the money back, you’d be best off not lending it.

Everyone I know can share a horror story of families torn apart by disputes about money. While you may think that can’t happen in your family, trust me. If it can happen in so many other families, it could happen in your family too.

Assuming you can afford to offer financial help, if a substantial sum will be involved — say, over $10,000 — it pays to get professional advice. Why? The IRS has some confusing rules about “imputed interest,” where you may have to declare interest income on a loan you make to a family member, even if you don’t charge any interest or if you charge a very low rate. So see a tax advisor.

If you’re going to refinance a loved one’s sub-prime mortgage, make it official. See a lawyer; agree to terms, including the interest rate and monthly payment; and get the mortgage signed, sealed, and recorded.  Remember that there is likely a reason why the mortgage was sub-prime to begin with, and be sure you can afford to take the loss should things not work out.

If all goes well, this mortgage can be a blessing – not only for your relative, but for you, too. It’s wonderful to be able to help someone you love fulfill their dream of buying a home of their own, while you earn as much or more on your money than you would in a savings account. Having been both a home lender and borrower, I can attest to that!

* Nancy Castleman is co-author of "Invest in Yourself: Six Secrets to a Rich Life" and founder of Good Advice Press. Nancy has spent the last 23 years teaching people how to get out of debt, save money, and live better on less. She writes about all of these subjects for CreditBloggers.com and Credit.com.

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