Helping Adult Children Financially Can Lead to Insolvency

It is a tale I am hearing far too often: “I was helping family financially and now I can’t afford my own bills”. Between the high cost of housing, student loans and the lack of quality full time jobs, Canadians in their 20’s and 30’s are stretched to the limit and their parents, and sometimes grandparents, are stepping in. The problem is, for many this leads to an increased risk of their own insolvency.

Consider the story of one couple we helped, Frank and Susan (not their real names), also known as mom and dad. Frank and Susan are both retired and in their late 60’s with decent pensions. However, years of supporting their daughter and her family lead to financial strain. The decent pension for a family of two was stretched to helping a family of five.

It started several years ago when Frank and Susan loaned their daughter and son-in-law (we’ll call them Karen & Bill) $20,000 for a down payment on a house. The problem is that Frank and Susan didn’t have the money for the down payment so they borrowed it from the bank. The way they looked at it, their daughter and her husband both had good jobs, so wouldn’t have any problem paying back the loan. Besides, if they used their good credit to borrow the down payment, their daughter would avoid a high ratio mortgage (and the related insurance premiums) and would be able to obtain a better rate on their remaining mortgage. They thought they were making a good decision for everyone from a dollars and cents perspective.

Frank and Susan were also providing day care, but it was costing them a lot of money every day making the drive to pick up the kids at home, at school and take them to after school activities. Meanwhile, Karen and Bill were not giving mom and dad any gas money, or paying for the day care.

Soon Karen and Bill turned to mom and dad for more help. They needed a new furnace and once again asked their parents to help finance the repair costs. And when Karen and Bill were stretched financially from too much debt and overspending, mom and dad found themselves buying groceries to help out.

Before they knew it Frank and Susan had over $50,000 in credit cards and loans.

This is not an unusual scenario. There are many ways parents find themselves spending money supporting their adult children for too long:

  1. Parents are increasingly postponing retirement and taking on debt to help pay for their children’s education.
  2. Parents and grandparents are helping younger adults get a foothold in an expensive housing market or buy a car by cosigning or loaning them money for a down payment.
  3. Many become an alternative to payday loans, loaning money between paycheques or paying for the day-to-day living expenses of a second household.

We’ve even seen siblings helping out siblings financially when neither could really afford it. There is a risk however to both families for this kind of help.

Now older, and many retired, these same parents no longer have the time or income themselves to recover. They are much more susceptible to misfortune due to illness, disability, even the death of one spouse. While they may not care that their credit report will suffer, they do become burdened with debt themselves when their children default and stop making the payments.

What’s more, the adult children become deluded as to how much they can afford to buy. The bank of mom and dad doesn’t use the same credit capacity rules as a traditional lender. Often they find no need to balance their own personal budgets, when mom and dad will help out.

In fact, that’s exactly what happened in Frank & Susan’s case. Not only did they contact us for help, but they soon brought in their daughter & son-in-law to see me as well. Despite both having a decent income, Karen and Bill just couldn’t manage their own money. They eventually had to give up their big home and any hope of repaying mom and dad.

In the end, Frank & Susan filed a consumer proposal (owning their own home, and with both having a good pension the cost of filing bankruptcy was too high) while Karen & Bill, with 3 dependents, found bankruptcy to be the better solution.

What’s the moral of this cautionary tale? Helping out family is fine, but only if you can afford it. I get that the children need food and yes, help them out. But take a look around and see what the bigger problem is. Did Bill and Karen need a new house? Would they be better off on their own, learning to live within their means and balance a budget? And no matter what, don’t risk your financial security in order to make life easier for your children or grandchildren.

If you are facing debt under these same circumstances, sit down with a family and talk it through. You may have to tell your children you can no longer provide them with financial support. Consider if you both need to speak with a debt expert about how to resolve your situation.

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