Dear Rick:
I have a 27-year-old son who is totally fiscally irresponsible. I just discovered that he is in severe debt, and I just had to give him money to pay his utility bills. They were about ready to shut his service off unless he made a payment. Currently, he owes about $75,000 on his charge card and also has about $150,000 on his mortgage. Unfortunately, his house is only worth about $115,000. He is also late on his mortgage payment. My son would like to borrow money from me to pay off his charge cards and to pay off his mortgage. I want to help my son; however, if I loan him the $225,000 and he does not repay it, I would be in trouble-I would not be able to pay my bills. My son is honest and I know he’ll make every attempt to pay me back, but I’m not sure he has the means. Currently, he makes about $40,000 a year. My question to you is, other than loaning my son the money, is there any other options that you can recommend for him?
Thank you.
Madeline
Dear Madeline:
The first thing I would do would be to determine if your son has a realistic chance to repay your loan. Therefore, what I would do is to have him sit down and put together a listing of where his money is going. In addition, it is important that your son realizes he is going to have to change his spending habits. It is obvious your son is living above his means and he must be willing to change his spending habits and become much more disciplined with his money.
By looking at your son’s expenditures, the two of you should be able to determine what he needs to cover his living expenses. That number subtracted from his take-home pay will leave you with what he has left to repay your loan. For example, if his take-home pay is $30,000 a year and his new cost of living is $25,000, there is only going to be $5,000 left over to repay you. Just based upon those numbers it would take him over 40 years to repay the loan.
I venture to say that once you sit down with your son and you look at his expenditures, you can realistically conclude that it would be doubtful that your loan would be repaid. Therefore, since you will need that money to cover your expenses and lifestyle, you would be taking a substantial risk to loan the money to your son. I know that’s not necessarily the answer you wanted to hear, but it is reality. This is one of those times in life that you have to be somewhat selfish and look at your own interests first.
I have another alternative for your son that I would recommend the explore. Based upon his income and his outstanding debt, my recommendation is to consider bankruptcy. I look at your son’s financial situation, and in looking for what’s best for him, I believe that from a financial standpoint he needs a fresh start. Yes, that would mean losing his home, and increase the cost of any borrowing he may do in the near future; however, the offset is that more likely than not his charge card debt and the balance of the outstanding mortgage would go away. Freeing himself of the debt would allow him that fresh start so that he can get his financial house in order. In that regard, I would tell your son that bankruptcy does give people a second chance. The key is he has to take advantage of it. He needs to be more fiscally responsible, and he needs to live within his means. In other words, he needs to know that he can’t run balances on charge cards. Whether he takes a class on personal financial planning or reads a book, he needs to educate himself about personal finance and have the discipline not to overspend.
Bankruptcy is another tool in our tool chest that people in severe financial difficulties should not be hesitant to use. After all, corporate America has used the bankruptcy laws to its advantage and there’s no reason why we shouldn’t follow their lead. The key is to sit down with a qualified bankruptcy attorney so you can understand the process and the outcome as well as the consequences of bankruptcy. Just because you’re in debt does not mean you file for bankruptcy; however, like the situation at hand, if there is no realistic chance that even with a payment plan you are going to be able to repay your obligations, you owe it to yourself to explore bankruptcy.
Good luck!
If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.