File bankruptcy, consolidate, or other options?

Question

So, during the economic downturn, my parents' business was seriously struggling (as in not making enough income to cover its own expenses) and my parents made a few bad decisions while trying to save it to the tune of $45k in credit card debt, all of it at around 19.5% interest.

With the income they have and the negative economic outlook for the next couple of years, there is absolutely no way in hell they would be able to pay the debt off.

They are, however, paying slightly above minimum and haven't had any late payments.

They also own a house where payments have always been made on time.

They're also both about five years away from retirement.

I'm in a position where I would be able to pay off all of their debt within a few months, but it would empty out all of my emergency savings and set me back another couple months. (I'm a contractor so I'm also planning on having to make a massive payment to the government around April.)

I'm not opposed to paying it down, but I'd rather not if we can find a way around it.

The way I see it, they have nothing to lose by filing bankruptcy. (They're in Florida.) The house is theirs, which creditors can't take unless they can't make payments. They don't need credit cards or good credit. They can liquidate the business and use whatever proceeds are from there to pay off some of the debt. Since everything else is credit card debt, it should just wipe clean. My parents aren't the extravagant type in buying jewelry, going on trips, etc ... All of the debt really was in trying to save the business.

Another option I see is consolidating the debt, but I don't exactly know how they would go about it.

Edit: Another option I just thought of is that I pay it down and then they make their payments to me, but honestly, I'd rather see both of them retire than continue working for measly pay trying to pay this off.

Last is pay it down entirely, but that knocks all of us down to zero, and if something was to come up that required funds, there wouldn't be any. Personally, I'd rather pay $10k to a lawyer to clear their debt rather than $45k to the creditors.

Of course, the piece that remains is the social stigma of filing bankruptcy, but that's a different issue.

Has anyone else been in a similar situation or knows what other options may be?

Edit to add some clarification:

When I say five years from retirement, I mean five years from Social Security. The business is no longer losing money, but the intention is to close it ASAP. They tried to sell it over the last year with the idea being that funds from the sale would clear the debt, and they can work part time to pay their bills.

Getting the business sold for any decent value didn't happen. Now the idea is to get rid of the debt one way or another, close the business (or sell it for any offer is made), and work part-time for extra cash until official Social Security age. Any remaining expenses, I can easily cover without a problem.

Personally, I want them out of the business for nothing else but to get the stress out of their lives. I'd have no problem paying the mortgage and/or their daily expenses since there's really not much there.

Answer 1

If your parents' business isn't viable (regardless of what combination of the economy or their management of it caused it not to be viable) it would seem that you'd be throwing good money after bad to save it.

If the whole thing gets paid off, then they get rid of the debt, but the economy will still be in the tank and they'll be going in the hole again.

If they think they're five years away from retirement, then they're kidding themselves. They won't be able to retire.

They should get bankruptcy advice and should start looking for other sources of income. Maybe sell their house and get something smaller. Have their expenses match their income.

Sorry if this sounds harsh but it will be difficult for them to recover from this mess if they're in their late fifties.

Answer 2

If your parents can afford to shell out $1,250 a month for 5 years, they would pretty much have the debt paid off, provided the credit card companies don't start playing games with rates. If that payment is too high, maybe you could kick in $5k every few months to knock the principal down.

If they think the business can keep puttering along without losing more money, that may be the way to go. Five years is long enough that the business or property may have recovered some value.

Another option, depending on the value of the home, could be a reverse mortgage. I don't know how the economy has affected those programs, but that might be a good option to get the debt cleared away.

My grandfather was in a similar position back in the 70's. He owned taverns in NYC that catered to an industrial clientele... the place was booming in the 60s and my grandfather and his brother owned 4 locations at one point. But the death of his brother, post-Vietnam malaise, suburban exodus and shutting of industry really hurt the business, and he ended up selling out his last tavern in 1979 -- which was a dark hour in NYC history and real estate values.

A few years later, that building sold for a tremendous amount of money... I believe 10x more. I don't know whether there was a way for his business to survive for another 5-7 years, as I was too young to remember. But I do remember my grandfather (and my father to this day) being melancholy about the whole affair. It's hard to have to work part-time in your 60's and be constantly reminded that your family business -- and to some degree a part of your life -- ended in failure.

The stress of keeping things afloat when you're broke is tough. But there's also a mental reward from getting through a tough situation on your own. Good luck!

Answer 3

A couple of thoughts from someone who's kind of been there...

Is the business viable at all? A lot of people do miss the jumping-off point where the should stop throwing good money after bad and just pull the plug on the business. If the business is not that viable, then selling it might not be an option. If the business is still viable (and I'd get advice from a good accountant on this) then I'd be tempted to try and pull through to until I'd get a good offer for the business. Don't just try to sell it for any price because times are bad if it's self-sustaining and hopefully makes a little profit. I does sound like their business is on the up again and if that's a trend and not a fluke, IMHO pouring more energy into (not money) would be the way to go. Don't make the mistake of buying high and selling low, so to speak.

I'm also a little confused re their house - do they own it or do they still owe money on it? If they owe money on it, how are they making their payments? If they close the business, do they have enough income to make the payments still? Before they find another job, even if it's just a part-time job?

As to paying off their debts or at least helping with paying them off, I'd only do that if I was in a financial position to gift them the money; anything else is going to wreak havoc with the family dynamics (including co-signing debt for them) and everybody will wish they didn't go there. Ask me how I know.

Re debt consolidation, I don't think it's going to do much for them, apart from costing them more money for something they could do themselves.

Bankruptcy - well, are they bankrupt or are they looking for the get-out-of-debt-free card? Sorry to be so blunt, but if they're so deep in the hole that they truly have no chance whatsoever to pay off their debt ever, then they're bankrupt. From what you're saying they're able to make the minimum payments they're not really what I'd consider bankrupt...

Are your parents on a budget? As duffbeer703 said, depending on how much money the business is making they should be able to pay off the debt within a reasonable amount of time (which again doesn't make them bankrupt).

Answer 4

I think you're asking yourself the wrong question. The real question you should be asking yourself is this:

"Do I want to a) give my parents a $45,000 gift, b) make them $45,000 loan, or c) neither?"

The way you are talking in your question is as if you have the responsibility and authority to manage their lives. Whether they choose bankruptcy, and the associated stigma and/or negative self-image of financial or moral failure, or choose to muddle through and delay retirement to pay off their debt, is their question and their decision.

Look, you said that loaning it to them was out, because you'd rather see them retire than continue to work. But what if they want to continue to work? For all the stress they're dealing with now, entrepreneurial people like that are not happy

You're mucking about in their lives like you can run it. Stop it. You don't have the right; they're adults. There may come a time when they are too senile to be responsible for themselves, and then you can, and should, step up and take responsibility for them in their old age, just as they did for you when you were a child. But that time is not now.

And by the way, from the information you've given, the answer should be C) neither. If giving or loaning them this kind of money taps you out, then you can't afford it.

Answer 5

Tough spot.

I'm guessing the credit cards are a personal line of credit in their name and not the company's (the fact that the business can be liquidated separately from your parents means they did at least set up an LLC or similar business entity). Using personal debt to save a company that could have just been dissolved at little cost to their personal credit and finances was, indeed, a very bad move.

The best possible end to this scenario for you and your parents would be if your parents could get the debt transferred to the LLC before dissolving it. At this point, with the company in such a long-standing negative situation, I would doubt that any creditor would give the business a loan (which was probably why your parents threw their own good money after bad with personal CCs). They might, in the right circumstances, be able to convince a judge to effectively transfer the debt to the corporate entity before liquidating it. That puts the debt where it should have been in the first place, and the CC companies will have to get in line. That means, in turn, that the card issuers will fight any such motion or decision tooth and nail, as long as there's any other option that gives them more hope of recovering their money. Your parents' only prayer for this to happen is if the CCs were used for the sole purpose of business expenses. If they were living off the CCs as well as using them to pay business debts, a judge, best-case, would only relieve the debts directly related to keeping the business afloat, and they'd be on the hook for what they had been living on.

Bankruptcy is definitely an option. They will "re-affirm" their commitment to paying the mortgage and any other debts they can, and under a Chapter 13 the judge will then remand negotiations over what total portion of each card's balance is paid, over what time, and at what rate, to a mediator. Chapter 13 bankruptcy is the less damaging form to your parent's credit; they are at least attempting to make good on the debt.

A Chapter 7 would wipe it away completely, but your parents would have to prove that they cannot pay the debt, by any means, and have no hope of ever paying the debt by any means. If they have any retirement savings, anything in their name for grandchildren's college funds, etc, the judge and CC issuers will point to it like a bird dog. Apart from that, their house is safe due to Florida's "homestead" laws, but furniture, appliances, clothing, jewelry, cars and other vehicles, pretty much anything of value that your parents cannot defend as being necessary for life, health, or the performance of whatever jobs they end up taking to dig themselves out of this, are all subject to seizure and auction. They may end up just selling the house anyway because it's too big for what they have left (or will ever have again).

I do not, under any circumstance, recommend you putting your own finances at risk in this. You may gift money to help, or provide them a place to live while they get back on their feet, but do not "give till it hurts" for this. It sounds heartless, but if you remove your safety net to save your parents, then what happens if you need it? Your parents aren't going to be able to bail you out, and as a contractor, if you're effectively "doing business as" Reverend Gonzo Contracting, you don't have the debt shield your parents had. It looks like housing's faltering again due to the news that the Fed's going to start backing off; you could need that money to weather a "double-dip" in the housing sector over the next few months, and you may need it soon.