Should Parents Bail Adult Children Out of Debt?
No subject is more emotionally charged than that of finances, says Kim McGrigg, national spokesperson for Money Management International, a nonprofit credit counseling agency with branches all over the country. "Sometimes it's very, very hard to separate emotions from rational decisions that have to be made," McGrigg notes. "The parent-child relationship only amplifies the difficulty."
Many experts say you should never loan money to your children. But there are situations that warrant assistance: emergency funds for a disaster or medical expenses for instance. Yet times are unusually tough for younger people who got caught up in the no down payment mortgages that were handed out to loan applicants who weren't financially ready to shoulder the burden of house payments in an unsteady economy. Maybe their job situation has changed with downsizing and business failures or their life situation got more complicated with the addition of children or a divorce and child support payments. In addition to contending with the economy, boomers' children have more material temptations than their parents had and take it for granted that some items we would call extras are necessities.
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The very first thing parents should do when approached for financial help by their adult children is to discuss the situation with each other. For married spouses it is essential that they have taken a close look at their own personal finances. Parents often end up giving so much help to their children that they can no longer maintain their own standard of living. Divorced parents should have this conversation before their children ask them for funds so they can present a united front and not be played against each other.
It's a very personal decision for parents, but what you do will set a precedent for the future. At the least, take advantage of the situation as an opportunity for a "teachable moment." Bailing adult children out of a situation they created themselves is not helpful without planning and follow-through. Even a gift, rather than a loan, will only give immediate relief, points out McGrigg. What will happen when that money runs out? Can your kids handle all their expenses on their own or are they going to constantly be in need of help?
"Determine whether you are offering help," McGrigg advises, "or enabling." Enabling is doing things for your children that they can do for themselves. In the case of an adult child who has requested money more than once to pay off credit cards, for instance, to keep supporting overspending is to perpetuate a dangerous habit. This is enabling. If there is no incentive to change, the behavior will continue.
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Mark Hrisko, author of Kangaroo Millionaire and a top national speaker for Robert Kiyosaki's Rich Dad, Poor Dad national seminars, notes that a financial bailout may have emotional repercussions for the entire family. "When adult children take money, they can feel dependent, and those feelings of dependency can cause resentment towards the parent who helped them financially." Resentment goes the other way, too: it can be a shocker for parents who have withdrawn money from retirement to help when the gratitude is short-lived.
Therefore, make certain your adult children have done their due diligence and tried everything before considering giving them money. Have they sold their assets to pay bills? Have they downsized their means of lifestyle? Have they cut up the credit cards? Are they going to seminars or seeing a financial counselor and negotiating with creditors?
If you have the resources to safely cover your children's debt, treating the transaction as a business deal will provide a wealth of experience. Have your kids sign paperwork with a repayment schedule and outline consequences if the debt is not repaid, one of which will be no future handouts (excepting disaster or medical relief).
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The agreement could also come with other requirements. For a chronic overspender, for instance, you could delay actual possession of the loan money until you see some progress has been made in changing the behavior. Or you could point them toward Debtors Anonymous (though there's no way to really monitor attendance).
Perhaps the most useful thing a parent can offer is access to a financial counselor. Money Management International, for instance, provides credit counseling, foreclosure prevention and bankruptcy counseling. The first hour on the phone is free and the basic fees are extremely reasonable reflecting state regulations. They also offer education: ebooks, webinars, podcasts, and a team of educators that goes out into the community for face time.
Make sure whatever financial counselor or service you use that they are an FTC, Federal Trade Commision, affiliate, says McGrigg and/or affiliated with one or more trade associations; e.g.,National Foundation for Credit Counseling (NFCC) or Association of Independent Consumer Credit Counseling Agencies (AICCCA). She also notes that it really is best to see a professional regarding foreclosure because the housing laws are changing so fast.
When your kids are children it's essential to meet their needs and keep them safe. When they are adults, parenting is all about letting go.
Judy Kirkwood can attest to what a sensitive and difficult issue this is in a family.
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