It’s a normal Sunday night. You are settling down to watch the next episode of “The Winter King” or “The Chosen”. The phone rings, or worse yet, the person you have been living with for six months or six years says, “Can we talk?” Either way, the facts come out. Your friend, daughter, aunt, uncle or whatever reveals his/her financial crisis. They owe money. A lot. And they don’t want to ask but “Is there some way you can help me?”
It has happened to me. The call was from a college friend. Married. Working. Kids. But, $35,000 in credit card debt that he has juggled for years was now crashing down. Last week he was turned down by the Bank of Nowhere for the Mastercard he needed to pay the minimums on a dozen other credit cards. So, there was no lifeline left. There was nothing sexy about how it happened. No sex, drugs or Taylor Swift tickets got him there. It was just living beyond household income.
Like anyone else, we want to help friends or family in a bad place. The answer is easy if you are struggling with your own balances and have no means to help. But today, we live in a society where you may have cash and the other person doesn’t. That fact alone can make you feel guilty. Then there are the times when you are living with someone and they reveal that they haven’t paid the mortgage or real estate taxes for “a bit” and people with badges are delivering “papers” that sound very threatening. Now your own residency is in the line of fire and relocation wasn’t on your to-do list. Typically, you have nothing to do with the creation of this emergency and may have had no awareness of its existence. But, you know your checking account balance and it certainly would help keep your crib.
But should it? In the case of my friend, I had the ability to help and, having a law degree, I could gauge his options. The first and foremost question to any person asking for help like this is always: “What path takes you away from this crisis?” Second job; borrow from retirement; sell assets are all possible but difficult options. The next question is: “What happens if you don’t find a bailout?”
In many, if not most instances, the person making the ask doesn’t really know. The formulaic answers from debtors come back as: there will be lawsuits, foreclosures, evictions. And that may be true but what is really needed is expert advice on what the creditor can do to your friend or family member and on what timetable.
There are many answers to this question, and they often vary from state to state. Many states allow garnishment of wages. Other states do not. In some states foreclosure or eviction can be done with some haste. In other states it is an endless journey. If you are thinking about lending to help, you should know this. And your friend in need absolutely must understand the range of options. All too often they are frozen by guilt and feel overwhelmed. This is where you can help.
If you want to be a helpful friend, tell them to find a lawyer. The typical response is that they have no money to begin with, let alone money for a lawyer. Now is the hero moment where you say: “I will front the money for you to meet with a lawyer. Not to engage a lawyer but to get someone to evaluate if there is a solution. I may even help you finance the engagement of a lawyer IF I can see a path out of the predicament you are in.”
Usually, the best kind of lawyer to meet with is someone familiar with personal bankruptcy. Many people develop paroxysms the moment the “B” word is uttered. They conjure images of debtor’s prison, life without a credit card, car or house. This is mostly catastrophizing. And, just because you cross the threshold of a bankruptcy attorney does not mean you have to file for one. The consult is to assess what can be done to minimize the crisis.
If you can, try to go with your friend to the consult you are underwriting. This can get a bit convoluted because when you are in the room with an attorney and prospective client (your friend/family member), what your friend tells the attorney is not protected by attorney-client privilege. But, most people who are in serious debt problems don’t have information that is going to involve this “privilege.” Let the attorney navigate this problem. As we have written in the past, attorneys often appreciate when stressed out prospective clients bring a friend because the client is often too worked up to effectively listen to the attorney’s guidance. As a friend, you are in a better frame of mind to listen.
Debt comes in many different flavors. There is secured debt where you can’t sell your house, your car or your mobile dog washing machine without the creditor “releasing” the debt. There is child support and alimony debt. They differ, but under the right circumstances they can land you in jail. There is student debt, about $1.75 trillion, which is supposed to be non-dischargeable but this is a moving target sailing in today’s political waters. Then there is consumer debt; typically credit cards. The cards are $1.08 trillion. So, your friend has plenty of company.
The lawyer’s job is to navigate the sandy shoals of who gets paid and when and who can be ignored or discharged through bankruptcy. There is also a form of bankruptcy where you basically offer your creditors a plan to pay them in full. Not to say your friend is eligible or the plan will be accepted but even greedy creditors would rather have a court managed payment plan than an outright discharge of the debt.
How this is managed often decides when your friend will be eligible to get a new set of credit cards or a car or a house. But, to be clear, this is not stuff you can reliably manage yourself by reading blogs and newspaper columns.
As I told my friend with the $35,000 credit card problem: “If I loan you money to pay off your cards, I become the victim when you can’t pay me. Today, I’m saying no to your ask because Mastercard, Visa, Discover and American Express can afford to lose $35,000 from their list of assets far more comfortably than I can. And even if I loan you my money at 1/3 of their rate, it will still take you 10 years to pay me back.”
If you are lending without a clear understanding of when and how you will be repaid, face the fact that chances are high that you are giving money away. That’s fine if you can afford it but you may be setting the precedent called, The Gift that Keeps on Giving. We have seen clients who cannot deny what becomes a continuing subsidy for a family member’s prodigal lifestyle. Meanwhile, we have also seen a job loss and/or an uninsured medical crisis create a one time mountain of debt. All lenders need to understand how the borrower can best manage the debt and for that sound legal advice is the necessary first step.
