Parents: Read this before you help your kids with their debt

GET INFORMED BEFORE YOU HELP

As a Licensed Insolvency Trustee, we often speak with the parents of young adults when the financial situation for the child or the parents, or both, becomes untenable. By the time they approach us, options are sometimes limited due to the extent of the financial damage, and we find ourselves wishing we could have talked to them earlier. Here are some things we wish parents knew before they tried helping their kids with debt:

THINGS TO CONSIDER

Keep yourself on solid footing

Sometimes, it's the parents themselves that end up seeking out the help of a Licensed Insolvency Trustee after they've over-extended themselves to help their children. Perhaps they've loaned their children money they didn’t have, such that they had to take on debt to lend the funds. Or maybe they've reduced their hours at work to care for grandchildren, leaving the budget too tight to deal with unexpected expenses. In an effort to help their children avoid bankruptcy, parents put themselves at risk of the same thing.

While it may seem obvious to avoid this, it nonetheless can happen, because the financial impact of supporting children usually hits gradually. Initially, everyone involved may believe the support will be for a short-term only, and often there's an expectation that the children will pay their parents back. However, despite the best intentions, this doesn’t always happen.

We would suggest any parent considering lending money to their children lend only what they can afford to give without being paid back. And if you're providing ongoing support like child-care or covering expenses, set clear boundaries about the timeline for this support to stay within the limits of what you can afford to provide.

Get an agreement in writing

Many people don’t bother to formalize loans to their family members. While asking for a formal agreement can be awkward, it may be necessary if things don’t work out. There are many reasons it makes sense to document the loan and set terms, such as setting clear expectations and preserving legal rights.

In the unfortunate event that, despite your financial support, your child has to make an insolvency filing, you may end up a creditor in their proposal or bankruptcy. In this case, you could be eligible to receive a share of any distribution to creditors alongside others they owe money to. In order to have the same rights as other creditors you will need to be able to prove your claim. Having an agreement in writing, while not always crucial, definitely helps.

Get informed before you give advice

As a parent, you've spent many years giving your children advice on an array of topics, including finances. But if you're not well-versed in the options available to someone in serious financial distress, your well-meaning advice could help make things worse for your children.

For example, are you aware that certain assets, such as RRSPs and a portion of home equity, are exempt from seizure by creditors? If not, you may advise your child to liquidate those assets to pay debt, whereas they would've been protected if they'd kept them whole.

A Licensed Insolvency Trustee has the knowledge and experience to provide advice to those struggling with unmanageable debt. Even if your child isn’t ready to meet with them, you can reach out to a Licensed Insolvency Trustee who may be able to provide you with some helpful information.

Maximize the impact of your assistance

Is your intention to help fix the problem, or to provide temporary assistance to help your child delay having to dealing with a debt problem? When parents lend their children money to pay bills or service debt, they may be delaying the inevitable, depleting their own finances without actually helping their children fix their financial problems. If you would prefer to help fix the issue, you may want to have a discussion with a Licensed Insolvency Trustee, as the solutions we provide get rid of unmanageable debt rather than just managing payments in the short term.

One way parents can help their children is to fund a proposal to their creditors. In a Consumer Proposal, which can only be administered by a Licensed Insolvency Trustee, creditors often agree to accept something less than full payment of the amount owing to them where the proposal is better than what the creditor would get if the individual filed a bankruptcy. So even when parents can’t afford to pay off their child’s debt completely, by funding a lump sum proposal they can help them get rid of the entire debt.

WE'RE HERE TO HELP

If you're considering providing financial support to an adult child who is struggling with too much debt, make sure you do it the right way. The financial health of both you and your child may depend on it. If you need advice, a Licensed Insolvency Trustee is a great resource for dealing with debt.

FREQUENTLY ASKED QUESTIONS

Q: What is a Consumer Proposal?
A Consumer Proposal is a legal process to negotiate an extension of time and/or a reduction of debt with all the creditors at once. A Licensed Insolvency Trustee is required to file a Consumer Proposal. They'll work with you to determine whether a proposal is the best option, and to develop a proposal that is both achievable for you and beneficial for your creditors. For more details on the features and benefits of a Consumer Proposal, visit this page.

Q: How can I get more information about the best way to deal with my child's debt?
We offer free consultations to anyone looking for more information about dealing with debt. During a Financial Assessment we take an in-depth look at the debt and all related factors such as employment situation, family circumstances, spending habits and patterns to help us determine the best options to achieving debt relief. A full Financial Assessment may not be possible without the participation of your child, but we can share information generally about options based on the information available. Contact Charla Smith & Company if you'd like to book a free consultation.