Bailing family members out of debt: Think twice
By paying off another's debt, you risk them doing it all over again
To Her Credit
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.
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.
Take care of your credit!
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Published: December 19, 2008
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