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Home > Ask The Get Out of Debt Experts > My Retired Parents Had Their Account Levied by the IRS and Their Debts Are Getting Larger. – Sara

My Retired Parents Had Their Account Levied by the IRS and Their Debts Are Getting Larger. – Sara

“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?

Please post your responses and follow-up messages to me on this in the comments section below.

Big Hug!

My Retired Parents Had Their Account Levied by the IRS and Their Debts Are Getting Larger.   Sara
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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
  • MontgomeryTwigs

    Thanks, Steve. This is really helpful. We have some work to do in the coming weeks, but we are going to get them out of this mess and then take the steps to secure their future. Thanks again.

  • MontgomeryTwigs

    Another question: can my siblings and I actually inherit debt? In other words, if they die and their debts are larger than their assets, are we responsible financially for those debts?

    • http://GetOutOfDebt.org Steve Rhode

      No. Creditors can only look to their remaining estate for payment.

  • MontgomeryTwigs

    Hi Steve, Thanks for your response. I fear that you’re right about their house, and it’s going to be a big deal to get them to make a change there. They have lived in the house for almost 40 years. It’s actually not worth much more than what they owe — 340K is the best-case scenario. As far as how much they take out of their IRAs now, I think they are required to take out a certain amount each year based on life-expectancy/age calculations, and I’m trying to get them to tell me how much they will have to take out each year. I think it’s less than 10K each per year (there are 2 IRAs). But I think that they only started having to take money out recently (perhaps age 70?)

    Would it make sense to try to refinance the house-related debt and get their monthly payment on the debt (which is now $3K per month) down? Or does that just delay the inevitable? Or possibly use some IRA money ($100K or so) to reduce that monthly amount? I worry about taking anything out of the IRA because I worry that there will be unforeseeable costs related to their health that will come up (or some other storm).

    Thanks again for your response. :) I can’t sleep because I’m so worried about this.

     

    • http://GetOutOfDebt.org Steve Rhode

      I think you are really close to where you need to be to deal with this for a safer future.

      Unless we deal with the house issue now then it certainly only delays the inevitable.

      Your parents are around 70 now, they could be here another 18 years. In that time their income will come from limited Social Security, limited part-time income for now, a required minimum distribution from their IRA, and draining down the IRA to meet the difference.

      They have essentially a no equity house for which they pay $3,000 a month and still have maintenance and upkeep expenses. They might even owe taxes and insurance on top of that.

      Let’s say you pay off the house and then they need cash again. You go out and refinance the house which gives them a monthly payment and much less cash in the retirement accounts. Are you then going to help them make ends meet when it’s all gone?

      Unless we get your parents in a safe and reasonable position then their financial failure falls on you.

      I stand by my original opinion that based on their income I think the house is too expensive for them. It seems like a recipe for a disaster.

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