How and why to stop paying your children's debts
Consumer finance expert, author and “Opening Credits” columnist.
Deciding when and how much to help adult children through a hard time is tough, especially when you can erase the problem with the cut of a check.
Yet paying off their debts can set a precedent that begets one costly bailout after another. A 2017 Merrill Lynch and Age Wave report found that 62 percent of people over the age of 50 provided financial support to family members in the past five years. The average gift or loan was $6,500, and 80 percent of parents who extended the money did so because they believed it is “just the right thing to do.”
But is it?
Personal finance experts and experienced parents say a clear line must be drawn in the sand. Not only could regularly parting with hefty sums result in a personal hardship for you, it probably won’t do your child any long-term favors. While deciding where the end of the rescue line is and then honoring it may be hard, take it from the moms and dads who cut their kids off and closed up their checkbooks.
One financial rescue can start destructive pattern
Gary Nosacek, a Milwaukee church deacon and his family physician wife established a pattern of deleting their 22-year old’s credit card bills. In the beginning, they had a sound reason. “Our son had an injury playing football and it impacted part of the brain that deals with consequences,” says Nosacek. “He has bursts of impulses, so he’ll go out and spend. If he doesn’t have the money, he’ll come to us and say, ‘My charge card’s due and I'm $50 short.’ Since mom’s a doctor and I’ve been lucky in the stock market, we’ve helped.”
While the Nosacek’s intentions were good, it triggered a cycle of dependence. Their son receives Social Security Disability Insurance benefits and can work part-time with doctor approval. “We were going in circles about him maxing out his card and then not having funds to pay it,” says Nosacek. “He kept wanting us to either loan him the money against his next SSDI payment, which I wouldn't do as I did that for a laptop and clothes a year ago and he fought me over the amount of repayments, or wants us to pay it outright.”
Although a one-time debt deletion can be a kind gesture that provides relief, being a constant benefactor leads to money muscle atrophy for the recipient.
“If parents are often paying off their children's debts or bailing them out of troubling financial situations they got themselves into, they are enabling their children,” says Derek Hagen, founder of the Minneapolis -based financial planning firm Fireside Financial. “This is especially true if they are employable adults. Providing financial help to children who shouldn't need help can actually cause more financial problems in the future.”
Worse, if paying your child’s bills begins with a fight with you first denying the request and then conceding, you’re rewarding poor behavior. “Giving an ultimatum or saying, ‘This is the last time,’ and not following through means you just keep crying wolf,” says Hagen. “You lose credibility.”
Their debt can become your downfall
Milwaukee-based bankruptcy attorney Michael Burr warns against over-gifting to insolvent adult children as too often it robs the parents of their own financial security.
“I often see parents who struggle to pay their own bills because they went too far in helping pay their children’s debt,” says Burr. “I recently worked with a married couple who paid off their 20-something son’s credit card bills,” he says. “Their son had accumulated over $25,000 in high-interest credit card debt. The son had fallen far behind on the payments and creditors were constantly calling the parent’s home.” Rather than letting their child dig his way out of his own mess, they emptied out their emergency fund for him.
Problem solved? Not quite. Soon after zeroing out their son’s liabilities, the father lost his job. The money they used was the bulk of their emergency fund. After many months of unemployment, the couple was unable to meet their household expenses and were on the verge of foreclosure. To keep the home, they were forced to file for Chapter 7 bankruptcy.
“Had they kept their emergency fund intact and not paid their son’s credit card debt, they would have avoided bankruptcy altogether,” says Burr. “As someone who regularly sees the downfall of parents paying for their children’s debts, it's important to keep yourself in mind first. Parents have much less time to rebound from a major financial setback compared to their children.”
Then there’s the emotional pain parents experience when they’ve reached their breaking point. Hillary Nowak, a registered nurse from San Diego, recalls the day she finally severed the financial aid cord with her nearly 25-year old daughter.
“She called me on the third of the month telling me that she needs money for rent,” says Nowak. “I was just dumbfounded. She was at Disneyland the day before, spending a lot of money, I’m sure. I lost it and yelled at her.” Nowak conceded, but said that would be the last time she bailed her daughter out.
After coming to her daughter’s financial rescue many times in the past, saying “no more and not again” was horrible. “She’s always going to be my baby,” says Nowak. “I felt like I was abandoning her. I felt so mean. I wanted her to be OK, but I was afraid. What would she have to do to get the money if I didn’t pay next time? Would she sell drugs? Be on the street?”
Such dark fears, though, were unwarranted. “My daughter woke up,” says Nowak. “She’s figuring things out herself. Like I know she has a maxed credit card but she didn’t ask me for help. She took on some extra jobs. I think she’s OK.”
Letting your children wrestle with their own financial troubles is usually the best course of action. The conclusion of a now-classic University of Buffalo study, “Whatever Does Not Kill Us: Cumulative Lifetime Adversity, Vulnerability and Resilience,” found that dealing with adverse life experiences fosters adaptability and resilience. So if you want your children to succeed, allow them fail and recover.
4 ways to help adult children take financial responsibility
To make it easier for stop bailing out your adult children, Kerri Moriarty, a founder of Boston-based Cinch Financial, a personal finance company catering to young adults, offers the following tips:
- Redefine the concept of generosity. If you’re paying debts your children have racked up by being careless, you’re not being generous. Instead, you’re robbing them of the maturation process. To really be helpful, help less.
- Don’t worry about their credit ratings. Sure, missed payments, high debt and collection accounts damage a person’s credit rating. Yes, it will make it more difficult for your child to secure a job, a place to live or qualify for low rate financing. But this is not your fight. Credit scores rise with positive credit activity and decline with the opposite. That means improvements are entirely within their control, so back off.
- Be a cheerleader – and financial leader. Every kid, no matter their age, wants their parent to have faith that they can overcome obstacles. Go ahead and convey that message. While you’re at it, teach the skills you’ve learned along the way. “Work with them to develop a strategy and the financial discipline to do it on their own and not repeat this scenario again in the future,” says Moriarty.
- Clarify your limitations and intentions. Explain that you refuse to be a bottomless ATM. If you decide to help out in an emergency, outline what that means, precisely. For example, if your child charges an uninsured portion of a dentist bill, you might be willing to assume that portion of the credit card bill. For a debt acquired for a spring break vacation, the answer will be no – and don’t even ask.
Offer financial solutions and firmness, not cash
Another suggestion, from Hagen, is to offer a different type of support, such as arranging for a financial planner, therapist or career coaching for your adult child. If you’ve got the means, it could be the best way to help your children to learn to manage their affairs. Or send them to an accredited credit counseling agency, which is free.
Try not to delay pushing capable kids out of the financial support nest, says Nowak, who wishes she had done it sooner. “When you pay for your child’s debts and basic needs at an older age, your taking away their desire to be independent,” she says. “You’re stealing from them. My advice is to let them crash. It’s hard, but you can do it.”
Nosacek agrees. “You constantly think this is your little boy or girl and it’s your responsibility to make everything OK,” he says. “It’s not good to fix everything, though. We know that now.” He and his wife revoked the get-out-of-debt option last December and today their son is starting to manage his money and credit. “He has a bank card where he can round up his payment and the bank will put the remaining in savings,” says Nosacek, impressed that his son is employing smart strategies to get ahead rather than slip behind. “It’s a lightbulb that’s going off!”
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