Should I take out a loan to pay off a relative's credit card debt?

Question

Recently a close relative revealed to me that she has run up $40,000 in credit card debt over the last few years, which she can no longer manage because the interest payments are eating up all of her disposable income, making it impossible to pay down the debt. Since I'm in a good financial situation, I offered to help her deal with this problem; now I just have to figure out what is the best way to do it.

I personally have no financial problems -- my only outstanding debt is for a mortgage on my condo, and it is ~90% paid off, and my income from my job is well above what I need to pay my own expenses.

Therefore, I'm tempted to take out a HELOC (or a similar loan against the equity of my condo) in order to pay off the credit card debts ASAP, so as to "stop the bleeding" of high interest rates and help her get back to a stable situation. (She could then pay me back at her leisure, or if not, I could eat the expense and call it good karma) However, I've heard it suggested that this is an unnecessary risk/expense for me to take, and that there are better (and/or cheaper) ways to address this situation.

The other extreme would be to do nothing except suggest that she declare bankruptcy, but I think that having to go through a bankruptcy would be very stressful to her and so I'd like to avoid that if possible.

A compromise solution might be to help her pay off part of the debt and leave the rest to pay off herself, although that seems sub-optimal since the remaining debt might just balloon up again, leaving the problem unresolved despite the money I put into solving it. (And presumably any debt left on credit cards would carry a higher interest rate than a HELOC/home-loan would)

She's in her seventies, retired, and living on a fixed retirement income. Can anyone who has encountered a similar situation provide some advice on a wise way to proceed here, and or point out any pitfalls to avoid?

Answer 1

This is a very generous impulse on your part. I'm going to criticize it, but please understand that I believe your intentions are great.

What can go wrong

You pay off her $40,000 debt. She is now debt free. You know what that means? Better credit. She can now borrow more money. This time she runs up $50k debt and is worse off than she was when you helped her.

You're right that $100k is a manageable level of debt. But the problem is that if you bail her out now and she doesn't fix the fundamental problem, you'll have $100k debt and a relative that needs help. The cheapest time to fix the problem is today (it was cheaper yesterday, but that's no longer available). Fixing the underlying problem is more important than fixing the immediate problem.

How you can help

First, list all her expenses for a month. We basically want to divide into three categories:

• Necessities: food, rent or mortgage, utilities, etc.
• Luxuries: premium cable, bingo, etc.
• Debt costs: minimum payments, interest, etc.

Obviously we can wipe out debt costs entirely. Either you pay them or she declares bankruptcy. But then the question is if she has enough money to cover her necessities and a reasonable amount of luxuries. The goal shouldn't be to wipe out luxuries. The goal is to limit them to a manageable amount each month. Perhaps she is even living without luxuries now. If so, add some back. Once you have that budget, the question is if she has enough income to support it.

If she does not have sufficient income to support a basic budget with some left over to save up for emergencies, then her debt is not the problem but only a symptom. She needs to work out a way to live on her income that is reasonable. She can't assume that there won't be expenses (e.g. replacing appliances). Those will happen. She needs to be able to put away money each month to handle that.

The most likely thing in that situation would be to move to somewhere cheaper. But we don't have to jump right to that solution. My suggestion would be to pay her expenses for a month. If you pay everything for one month, you will get her basic monthly needs. Work up a spreadsheet for her where you divide the expenses up into the three categories. Then you can write a budget from that.

If there simply isn't enough money, you've given her a month to relax. Show her the problem and start talking solutions. Moving is one of the more extreme options. There may be others that are easier that I can't see because I don't have her expenses list. Or because you are more familiar with the area. Or I'm not smart enough. Another possibility for a homeowner would be a reverse mortgage.

Bankruptcy

Once you have a manageable budget, then bankruptcy should be a serious option. A decent bankruptcy lawyer will be able to make it not too stressful. You can pay for the lawyer. They're expensive (e.g. $2500 is in the ballpark for my locality; yours may be different) but manageable. Bankruptcy does two things:

1. It clears her current debt.
2. It makes it harder to take on new debt.

Both of those are desirable. The former because it allows her budget room to breathe with her income. The latter so that she doesn't get in the same problem again immediately.

Let's say you spend $5000 on a bankruptcy lawyer and another $5000 paying her expenses for a month. That still leaves you $30,000 cheaper than just paying off her debts. Create an account and deposit monthly until you have put in $30,000. That's the money you have for helping her. Now, when she gets stuck with an expense that previously would have sent her into debt hell, you can help her with that money.

A side effect of this is that you will be on hand to offer advice when she's struggling. You can steady her if she panics.

Review

This approach is just as generous as your impulse, but it will be safer in the long run. It allows you to control how you help her and intervene if things are going off the rails. Ideally your job would be over once the budget was set and the bankruptcy lawyer paid, but that ideal may not be feasible. This proposal allows for that and leaves room for future emergencies in a way that your impulse does not.

This approach also costs less, but I'm not sure that's the most important part. The goal is for her to live an independent, joyful life. I think that this is a better approach to achieve that.

Answer 2

I personally have no financial problems

Are you in desperate need of a financial problem? Taking a loan to pay someone else's debt is the fast lane to a financial problem.

Unless this is your spouse, because their debts would be yours anyway, do not incur debt for them. If the debt is insurmountable, have the person file bankruptcy and be available to help them through it. If the debt could be managed, by all means help managing it. Call creditors, seek settlements or reductions, or lower rates, or whatever. But, do not tie this noose around your own neck.

Answer 3

First, you loaning her money is out of the question. In my sternest Suze Orman voice, You Will Not.

Money is more intimate than sex, and there is a very wide gulf between "listening to her commiserate" and putting your own skin in the game.

Keep all liability firewalls up at full force

There are several types of liability shields which are built into the financial system for your protection. Use them to the max. Don't break them.

With rare exception, creditors can't touch the corpus of 401k or SS money, and in some states IRA money either. So don't you dare withdraw big chunks of that principal to pay off debt! That money is shielded and cannot be touched unless you are stupid.

The most basic liability shield is between you and her. Debt does not pass to relatives, unless the relative volunteers for that. Naturally every creditor really wants you to. Ergo you are not going to give her money in any way that would attach you to it. Like paying it off.

Use trustee structures

There is a legal structure that allows one person to manage the financial affairs of another person. It's most commonly seen when someone dies and an executor is appointed to wrap up the financial affairs of the deceased. However living people can have this too. They don't need to be incompetent, just willing.

This gives you the ability to take charge of the debt without having to touch it. The trustee has zero personal liability for the debts of the trust, unless he catastrophically messes up or tries to steal.

Don't even think of doing some sort of informal, ad-hoc halfway pretend version of this that's based on mutual understanding and lies. Do it with a judge or don't do it at all.

What does this do for you?

First, the trust gets a mailbox, gmail and vumber (eg Google Voice) and you give a formal change of address to the creditors. Now, if you strategically decide to stop paying them, and they cry and moan and blow up your phone, they won't bother her, they'll bother the trustee.

Second, when creditors try all their psyched out pressure games, you say "I'm the trustee" and boom, they drop the act. The relationship is different: it's just a business transaction.

Of course, the trust can cut off her credit and give her an allowance, arresting the behavior hard and fast. She would not like that, but the balancing force of reason may be exactly what she needs.

Basically, the trust lets you tag-team the creditors.

No bankruptcy. Period. Unless...

Bankruptcy is the conventional advice, but then, so is "Do the Dew". Really. Bankruptcy gets talked up by bankruptcy lawyers, who get $2500ish every time someone files. It can be useful in some cases where assets are involved (legal work in those cases costs more than $2500). If it's all unsecured consumer debt, bankruptcy is fast-forwarding to the worst possible outcome.

The upside of bankruptcy is the creditor calls and mails will stop. But as Doc Martin's aunt said in the first episode of that fine show, "Are you a man or a mouse?" And there are other ways to get that anyway.

Whereas, here's the damage. You have to volunteer (!) a list of attachable assets (instead of them having to hunt them down at their own expense), and you have to consent to all of them being liquidated to pay creditors. Hiding any is a crime. A trustee (sound familiar?) gets appointed to liquidate those assets, but he's not your buddy this time, he's a court appointed stranger and you have to pay his wage. At lawyer rates. WTH.

In fact, you pay for all the lawyers. You lose the most, keep the least and pay the lawyers too. And get a huge 10-year burn on your credit report. No wonder everyone wants you to do it!

So when you're ready for bankruptcy on unsecured consumer debt only, here's what you do instead.

Just stop paying them. Seriously. At this point, two clocks start ticking.

Yes, they will hew and moan, many calls, many letters. This is cheap posturing and can all be ignored. We talked about how to deflect those so they needn't be a nuisance.

Behind the scenes, the bank is hunting her assets. But they're doing a cursory search of things they can do automatically e.g. Via public records, they are looking to spend $10 on the question "are you worth suing". And you need to know that answer so you know if they're coming.

Even then, they may not be coming. They would first have to sue you, deal with your defense, win, return to court to attach or garnish assets, which could cost them $5000 or more in literally good money thrown after bad -- all the while praying you don't declare bankruptcy which would make all the effort wasted. In fact, the fact that you haven't declared bankruptcy may stay their hand, thinking you do intend to pay back or otherwise have them beat. As such, suing is something creditors do reluctantly unless they see a definite "brass ring" of attachable assets, which even so they may need to divvy up among other creditors. It's a big risk.

As I implied, bankruptcy is your ultimate nuclear weapon: mutual assured destruction. They don't get paid and your financial life is wrecked. Save it until they've already won the lawsuit and are about to take assets in a way that would be worse than bankruptcy!

You always have the option, at all times, even on the way out of the courtroom after having lost, to settle the debt for a fraction. Be sure to be super insulting with your offers, it is amazing what they'll settle for. They will ultimately sell your old debt to a collector for 5 cents on the dollar, so 20% may be accepted.

More likely than not, they will toss empty threats until the first clock has run down: that's your State's statute of limitations. The debt is now too old to sue for. It is time-barred. You are free of it. Unless you are super stupid: It is possible to restart that clock; don't.

The second clock applies to your credit report. 7 years (not 10) later, the bad debt is gone from your credit.

"But isn't 'just not paying them' unethical somehow because you are using tricks of the law to not pay?" That is exactly what bankruptcy is. They have equal ethical standing: either both are right, or neither. If you don't believe in them, don't do them. And you can use the trustee method, just tell the trustee you pay your debts. I very strongly endorse hunkering down, eating ramen, getting a job, and paying it all. There is nothing wrong, however, with mercilessly haggling them down on fees, interest and other blatant usury.

Answer 4

I currently assist a cousin who is struggling. Like your relative, she and her husband are in their early seventies, retired, and living on a fixed retirement income. Her husband is blind, disabled and in a wheelchair. He was the breadwinner so the larger income source is gone. She works two jobs and it just doesn't provide enough to survive. Out of caution, I send 12 checks a year rather than a lump sum so that she's not tempted to redecorate the living room or go to Vegas.

OTOH, I had a significant other that I assisted with digging out of the credit card hole. And once out, back in she went, racking up more debt and again being besieged by usurious 18+ % credit card interest.

My take on this is to determine what the cause of the debt was. If the debt was due to essential spending (survival) due to healthcare needs, rent, food, etc., no problem. But if it was due to wasteful spending on more fancy clothes, Home Shopping Network purchases of nonsense, the latest IPAD, etc. or gifts for 3rd cousins twice removed that you haven't seen in decades, then fahgettaboutit.

Bottom line? If the debt was from wasteful spending, I would not take a HELOC, adding debt to your existence with the wishful hope that your relative mends her ways. If her debt was due to unexpected medical illness and concomitant expenses then go for it.

Answer 5

Obtain solid evidence that this debt exists. It is not impossible that she has been misled to believe she has a huge debt by scammers preying on the elderly. If you don't 100% know the debt exists and it is legitimate, you may all be scammed out of money.

Answer 6

Of course not. The two options are basically:

1. The bank is out $40k and never gets paid back.
2. You're out $40k and never get paid back.

Why trade option 1 for 2? If you want to help her, help her get a good attorney and offer to cover the attorney's fees if/when she needs one (but see the other answers as to why she might not).

Other users are talking about weighing whether you'd be okay with gifting her $40k if (when) she doesn't pay it back, but that's a nonsensical way to look at the problem, because you wouldn't be giving it to her. You'd be giving it to the bank. Having loaned this money to somebody incapable of paying it back is 100% the bank's problem/fault. You have no interest in bailing them out.

Answer 7

Rather than take on secured debt to pay off her unsecured debt, I suggest helping her in other ways.

Start looking for resources/programs aimed at assisting those who are ill-prepared for retirement, low-income housing, food assistance, whatever. Attempt to negotiate rent down or consider breaking lease if the savings could be significant.

Helping her to budget and prioritize will be key, I personally wouldn't help someone in that situation unless they were willing to be fully transparent with me about their finances, the more someone takes responsibility for their predicament and the more they show willingness/ability to change, the more inclined I am to help. Unless her rent is several hundred per month more than some reasonable alternatives, then fixing the credit card debt alone won't likely prevent her from running into the same issue down the road.

Likely, you could help her significantly for much less of your own money if you helped her through the process of credit-card non-payment (maybe bankruptcy, but likely not even necessary). Negotiating with creditors may be effective, but not sure how valuable a good credit score is in her position. I've never heard a good thing about a for-pay debt-relief company, they are out to make money first, you can help her navigate that process, there are also some non-profits in this space that may be helpful.

California has a 4-year statute of limitations on pursuing debt, so they'd have a limited window to file suit. If it's $40k on one card, they are more likely to pursue legal action than if it's several smaller debts, but you can't squeeze blood from a turnip.

Just a hodge-podge of initial thoughts, may revisit later.

Answer 8

Read and follow the instructions in this really great article about the subject:

https://www.foxbusiness.com/features/lending-to-friends-and-family-your-4-step-guide

CHARGE INTEREST I didn't know that you must charge interest or the IRS will charge you imputed interest.

GET IT IN WRITING There are sample promisory notes out there that you can use. Does she have anything that could be collateral? house? car? jewelry?

Use a site that helps manage it like LoanBack or LendingKarma!

Automatic payment from her account to yours, every month. Or maybe those sites handle payments?

Have her agree that if she comes into any money unexpectedly, it goes to pay you off first.

Have her agree to pay off the cards in a smart way such as pay off the one with the highest interest first

EDUCATION Suggest she call the banks and ask for them to make a deal with her like stop interest and let her pay off with no more interest accumulation.

Suggest she enroll in a debt reduction / how to handle money class.

OVERSIGHT Weekly/bi-weekly/monthly look at finances together.

Have her use mint.com and you get a login so you can check on her financial situation. Require her to enter all old and new accounts - no financial accounts stay out, so you can have a full financial picture.

Have her sign up with CreditKarma and provide you with a login so you see her credit score.

TRIAL Loan her way less than 40k, say 3k, and see how it goes. If she ever pays late, or doesn't pay in the way promised, she still owes but knows she will not get any more money out of you.

A good way to build credit : borrow some money, get a CD (certificate of deposit) with, say, a year maturity date, use that CD as collateral for a loan to be paid off in same amount of time (a year). I did this when I was 17 to get started building credit. It's a forced savings program too because at the end of the year, the CD matures and she gets to take the $ out. Make a condition that at the end of the year, she pays all the $ from the CD to another credit card.

Answer 9

If you are worried about your relative being able to have a place to stay DO NOT PAY THEIR DEBTS.

Buy a house/apartment(complex?) and rent it to them. For $1/yr if you must.

$40,000 also is quite a lot of rent money.

Answer 10

Others have alluded to this, but you paying off the debt wouldn't actually fix the problem. You need to help her address the reason that she accumulated the debt in the first place.

You mentioned in the comments that her rent is already consuming a good portion of her disposable income, and it will continue to do so for at least 6 months. In fact, that's the primary reason she got in so much debt in the first place. The obvious question, of course, is why she didn't realize that she wouldn't be able to afford the rent. This actually makes a really big difference. Did she experience some kind of unexpected drop in income, or did she just not do the math to realize that she couldn't possibly afford to pay her rent?

If it's the former, it sounds like the fundamental problem is an income problem. Of course, even if she didn't experience an unexpected drop in income, it's still possible that she has an income problem. Either way, you should definitely help her plan a way to improve her income or reduce her expenses.

Another possibility is to have a roommate for awhile to help offset the expense of the rent.

Either way, unless something changes, there's a very good chance that she'll start accumulating debt again as soon as you pay it off - after all, if the reason that she got the debt in the first place hasn't changed, how is it reasonable to assume that she won't get more debt in the future?

Incidentally, one thing to be aware of for bankruptcy: it could make it more difficult to rent another place if they check credit in advance. Just something to keep in mind. In addition to the expenses associated with bankruptcy that other people have mentioned, it sounds like it won't really deal with the underlying problem.

TL;DR Getting rid of the debt won't help unless you address the reason that she got in debt in the first place.

Answer 11

If you take out a loan and give her the money, I suspect two things will happen - A) she may pay off her existing debt - but then again she may not - and she will almost certainly take the availability of an "angel" (that's you) to mean that she can rack up more debt, without penalty or responsibility; and B) you'll be out the money. My recommendation is to get her to a debt advisor who may be able to get the rates on her existing debt reduced, consolidate the debts to reduce the total payments, or something of that nature. But handing money to this person just makes you her "enabler" - you think you're "helping" her, but really you're giving her no reason to change her ways.

Answer 12

A helpful rule of thumb when dealing with personal loans is this:

Would you gladly and without question give the same amount to that person as a gift?

Since you are clearly concerned enough about the loan to ask about it online, the answer is a loud and resounding no. Unless the sum is small enough (or the situation serious enough) for it to warrant you giving the sum outright, you should not even consider a loan under the same set of circumstances.

Instead of giving a loan, you could instead offer to help with expenses while she pays off the rest of her debts (or pay a competent lawyer when she enters bankruptcy in order to discharge her debts).

Answer 13

let her file for bankruptcy, and the loan would be waived off. she will have a mark in her credit history but no matter it is her responsibility to take care things. If you help her she would/might just start with the same cycle of getting on debt again. If you have money to spend, you can donate to some charity cause or travel the world or treat yourself to some fine things or invest more in future income. Dont fuel her addiction, she should have been careful before buying all the unnecessary things. using credit card is like using the banks money, not paying back would not cost the person a thing, but she would learn a worthy life experience.

getting the loan back from her would mean burning the bridge between you too, after lets say a year or two.