“Dear Steve,
My parents are 70 and 73 years old, and they are retired now. They have 250K of debt in the form of a home mortgage and an equity line. They have an additional ~40K of credit card debt. Between the two of them, they have 420K in traditional IRAs. They have about 5K (after taxes) per month coming in from social security and part-time work. They currently pay about 3K per month against the 250K house debt, and their monthly expenses are more than 2K with all of their health needs, etc. They are getting further and further into a financial hole, and even though they are making monthly payments on their debts, the debts only seem to be getting larger, and they don’t budget for things like income taxes, etc. and had an IRS levy put on their accounts recently because they hadn’t paid. So, its’ a mess and getting worse. and I am working with them to get out of it. For the first time, I think they will accept my help.
We are going to go to a NFCC certified credit counselor to get some advice, but I have spoken with them (the counseling service) on the phone and they tell me that they can get a plan in place in ONE, one-hour counseling session. I’m skeptical, but am willing to try since it’s free. Do you have an opinion of places like this? It seems like they are mostly working with people whose creditors are after them, which is not currently the case (it has been in the past). Also, when they listed the items I need to bring with me to the appointment, they only wanted information about income, creditor statements (unsecured debt only) and summary of living expenses. Wouldn’t they also need information about assets (i.e. IRAs, etc) and information about secured debt (the debt associated with the house) to really help us? What do you think?
Second, my parents have enough money in their IRAs to pay off their debts. Not much more. it seems drastic, but would it make any sense to completely pay off all (or at least a big chunk) of their debt by pulling the money out of the IRAS?
Sara”
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The Answer
Dear Sara,
First, let me apologize in taking a few days to get to your question. I took a mental health weekend off.
Your observations about credit counseling are on target. A credit counseling program can be beneficial for the basic debt problem of wanting to get out of debt by lowering interest rates but it is not a sophisticated tool to use to deal with deeper situations.
In fact a credit counseling repayment plan is not designed for what is best for the consumer, they are dictated by the creditors.
From what you’ve shared it seems that even some of the unsecured debt here is created by a deeper underlying issue that your parents can’t afford both their home and to live. I would safely bet that part of the credit card balances were just trying to make ends meet using the credit.
Again, from what you’ve shared, they can’t afford the house. They need to lower their living expenses and should do that ASAP. Sell the house and rent is an initial logical solution. But let’s say they paid off their house with their IRA, there may be some doubt they could live simply based on benefit income alone and afford to care for the house, pay the taxes, and weather any future financial storm.
Under no circumstances do I feel they should touch their IRAs yet. That money is protected from creditors and they are going to need that money to help make ends meet. Before they touch anything there, we need an overall plan.
How much are they taking in distributions from their IRAs now?
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