This new online feature allows me to answer the questions I couldn’t get to during the live chat and to respond to questions you send by e-mail (email@example.com), Twitter (@SingletaryM) or Facebook (www.facebook.com/MichelleSingletary.com).
Don’t Lend Money That You Want Back
Q: Should I loan money to my mother-in-law?
My mother-in-law has asked my husband and me for a loan of $13,000 so she can afford to stay in her house (she needs the money to pay off her second mortgage so she can refinance. If she does not refinance she cannot afford to stay in the house). My husband would like to lend it to her provided she and he meet together with a credit counselor.
This whole thing makes me very nervous, but I understand family ties and wanting to do the right thing. We do have the money to lend without tapping into our “emergency” fund, but it will dry up our “normal” savings (but we’re not saving for anything special). What should we keep in mind as we discuss this? Do we need to set up a payment plan with her? I would like to, but would that be rude since she is family? She has said if we do not loan her the money she will have to take it from her retirement account, which also makes me nervous (she is 55). I don’t know what to do! I would love your insight.
Michelle: You are right to be nervous. Do not under any circumstances “lend” your mother-in-law the money. If you and your husband decide together that you want to help her stay in her home you should “give” her the $13,000 with no strings or expectations attached. Lending money is one of the quickest ways to ruin a relationship. So, if as you indicated, giving her the money won’t put your own finances in jeopardy, give away. And if you give her the money, you won’t need to worry about a payment plan.
Also, just take note of any gift tax consequences. There is an annual exclusion that allows you to give a certain amount of money free from federal gift taxes. The person or couple in your case is generally responsible for paying the gift tax. This year the annual exclusion for gifts is $14,000 for individuals and $28,000 for couples.
Big Problem Revisited
Live Chat follow-up: I wrote to you about my semi-elderly parents (early 70s) who managed to get themselves into a pickle through years of “several small bad decisions” that steamrolled over time - cumulatively?
Well, things are finally looking up. They sold their huge, huge house on ten acres of land. This did nothing more than wipe out the mortgage, but it stopped the bleeding - very little extra cash when they walked out but no more repair bills and no more mortgage (or heating bills, etc). They are landlords, and they moved into one of their own apartments (they own it). They now live in 1000 square feet, which means they got rid of 48 year’s worth of possessions but for what would fit into 1000 square feet (and a basement). Their housing costs dropped dramatically, not to mention utilities.
Sadly, the (now) $120,000 in credit card bills will have to be wiped out. They are prepared for bankruptcy even though no one has sued yet and their attorney did the formula and it will probably work out to about half that to pay back over four years. They can handle $1,200 a month, especially since their old mortgage was much more than that. Unless of course one of them gets very ill after the process is over. If they do go through bankruptcy at some point and then they get very ill and bills rack up again, what happens? Right now I wonder if they are relying on luck more than anything since their assets took such a hit because of all of this.
For anyone reading - please remember -- tiny bad decisions will creep up on you, especially if you don’t learn from them and keep making them. Rolling credit over credit debt and using your house to finance your business expenses is bad, bad, bad.
Michelle: See my column from Sunday about how to become better at making financial decisions.
Q: I have my finances straight now, but for a long time I didn’t. No bankruptcy but lots of missed payments, too much debt, and a credit card was “closed for me” by the bank. I’ve heard that after seven years those things “fall off” my financial record and I can stop flinching every time my credit history comes up! I’m so ashamed of what I did back then and have been working so hard to correct my mistakes. Is it true about seven years wiping the slate clean?
Michelle: Yes, it’s true. Under the Fair Credit Reporting Act, the credit bureaus cannot report outdated negative information. A credit reporting company can report most accurate negative information for seven years and bankruptcy information for 10 years. The seven-year window starts from the date the event took place.