By paying off another's debt, you risk them doing it all over again
By Sally Herigstad
To Her Credit
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006).
Dear To Her Credit,
I have a granddaughter and husband who have been trapped by
making "no" choices. They are losing their home to foreclosure, and they
have been ordered to move by Jan. 15. They have found a more modest home, 30 years old, in a
stable neighborhood, which is in foreclosure. I will buy it for them and set up
a reasonable "rent," which will accrue to their ownership. They have some
current debt, which I will pay off, and add to the costs incurred in the home
purchase. What are the implications, pitfalls and questions that need
to be asked about the above, including the purchase of foreclosed property?
Will appreciate any help. Thank you. -- L.P.
Dear L.P.,
I would be very cautious buying a foreclosed home. A
foreclosed home is a distressed home, and some of that distress may rub off on
you and your granddaughter.
Here are some reasons you might want to think twice before
buying a foreclosure:
You
often can't inspect a foreclosure sufficiently or at all. (If you can't
look inside, don't buy it!) You may even discover a lien on the property
after the sale.
If
people still live there, do you want to be the one to kick them out? People
in trouble can be difficult to deal with. Some of them vandalize the
property or take light fixtures and cabinets out. Even though the
foreclosure had nothing to do with you, you might bear the brunt of their
frustrations.
Foreclosure-buying is hot right now, so you're not the only one
looking for a deal. When you show up at the auction, there might be 60
other potential buyers. Some of them are professionals; this is what they
do for a living. The competition can be stiff.
The
auction atmosphere can work against you. Unless you know exactly what you want
to pay and stick to it, it's easy to get caught up in the auction frenzy
and pay too much.
The
clincher: You don't need to buy foreclosures to get a good deal. In most U.S.
markets, you can get great deals the old-fashioned way -- by watching the
market carefully, looking for motivated sellers and not being afraid to
make offers.
A larger issue may be the wisdom of bailing out your
granddaughter and her husband. You say they made "no" choices, but
they chose to live beyond their means and get into debt. I admire your
willingness to help, but I think you might be a little too helpful.
I've heard many people say they just want a "fresh
start." But if that fresh start comes too easily, in a few years they can
be back in line looking for another fresh start -- and another and another.
On the other hand, people who work overtime, stop eating
out, and find other ways to pay off their own bills are much less likely to let
their debt get out of hand again. Doing it the hard way can be much more
beneficial in the long run.
One pitfall to your plan is the potential effect on your
relationships with your granddaughter and with your other grandkids. What about
other grandchildren who never get into debt? Will they feel shorted because they
don't get a house? And if this granddaughter can't keep up on the rent, will
she start to avoid you? Many generous lenders have found to their personal
heartbreak that it's the borrowers who can't pay them back who break off the
relationships.
Perhaps instead of putting all your energy into helping one
person, you can make one-time gifts to all your grandchildren so it doesn't seem
like one of them gets rewarded for being in trouble. A small gift is less
complicated than a large loan, and it won't cause misunderstandings and hard
feelings later on. And from your financial perspective, it's never a good idea
to lend money that you couldn't afford to give outright.
You sound like a most caring and concerned grandparent.
There's only so much you can and should do for other adults, however. Keep your
money relationships simple and straightforward. Your granddaughter and her
husband will find a place to live, and they will be fine.
Sally Herigstad writes about women and credit every week for CreditCards.com. Herigstad is a writer and finance consultant for MSN Money, a personal finance software product. She is also a member of the Washington Society of Certified Public Accountants and the American Institute of Certified Public Accountants. Her Web site is http://helpicantpaymybills.net. Sally Herigstad lives in Kent, Wash., with her husband Gary. They have two grown children, Valia and Grant.
To Her Credit answers a question about a debt or credit issue from a CreditCards.com reader each week.
Send your question to Sally.
Published: December 19, 2008
Three most recent To Her Credit stories:
How bad credit affects a new marriage – If your credit is bad and your new spouse's is good, you need to take certain steps not to taint the good credit spouse ...
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