George’s parents were applying to refinance their home when they found that George had opened several credit card accounts using their names. He even forged their signatures. When they confronted him, he simply shrugged and told them he couldn’t qualify on his own – how was he supposed to get credit?
Sarah’s parents cosigned a credit card application for her when she went to college. She always managed it responsibly. Ten years later they had forgotten about it. But Sarah was involved in a nasty divorce. Her ex-husband had maxed out that credit card, and refused to pay. Suddenly they were receiving collection calls for a card they didn’t even realize they had.
John and Louise learned after a car accident that their daughter had let her insurance lapse on a car for which they had cosigned the note. Now the bank expected them to pay off the loan on the totaled car, which was totaled in the accident.
Maggie, who was retired and living on a fixed income, discovered that her son, was being harassed by a collection agency for payments on student loans. He was unable to hold a steady job because he had been diagnosed with a mental illness several years earlier and she feared the calls would “push him over the edge.” So she tried to pay the loans herself from her limited income.
Some of the saddest credit stories come from parents whose children have intentionally or unintentionally incurred debts they can’t pay, sometimes in their parents’ names. Parents often feel responsible for their children’s welfare – and their bills – and pay to protect their children. Sometimes they do so out of guilt.
Stepping in to rescue a child from debt problems, however, may not always be the best solution. For some parents who have their own financial difficulties, it may be impossible.
So What’s a Parent to Do?
Here are some possible solutions when a child has involved you in their money problems:
Pay your child’s bills for them
This gets them off the hook and may protect their credit in the future if they want to obtain student loans, a mortgage or other types of credit. It does not, however, teach them anything about fiscal responsibility. It may even be irresponsible in the long run, if the child is unwilling to learn from his or her mistakes. Sometimes, however, parents must pay the bills if they cosigned the loans in order to protect their own credit.
If you decide to pay the bills for your child, it may be best to have formal repayment papers drawn up describing loan terms and have them signed in front of an attorney to reinforce the seriousness of the loan. If possible, arrange periodic payments to be transferred from the child’s bank account to yours – and charge interest and penalties for late payments.
Return the merchandise, if it’s an option.
If your child used your credit card to splurge on new ski equipment or other items that aren’t a necessity, you may be able to force her to return the merchandise for a credit. If she already used it on a trip to Vail, however, you may be out of luck. If possible, require her to pay up or take it back.
Warning: Beware of turning car keys over to a car dealer. A voluntary repossession can be just as damaging as an involuntary repossession on a credit report and the dealer may be able to sue for costs or for the reduction in value when the vehicle is resold.
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Report your child’s crime.
If your child opened credit in your name without your knowledge or permission, that’s called identity theft and it’s a crime. You can file a police report, which you can send to the credit card company to extricate yourself from the debt. Many parents, however, are unwilling to take this step since they don’t want their child to face the consequences. If you are unwilling to report the theft of your identity, however, you may well have to pay the consequences – and the debt.
Help your child solve the problem.
Together, you can contact GetOutOfDebt.org for help. Financial problems are often complex and require expert intervention for the best results.
Think about it this way, if the transmission in your car went bad, you probably wouldn’t disassemble it hoping to solve the problem if you aren’t a trained mechanic. Financial problems are similar. They have thousands of small parts and aren’t solved unless you put your financial life back together correctly.
In Maggie’s case, for example, her son may be eligible for a one-time reduction in his payments on his student loan, based on his income and expenses, and by sticking to that new schedule, he may be able to get his loan out of default. Once out of default, he could apply for an unemployment deferment that would reduce his payments until he is back on his feet.
Tips for All Parents
- Think carefully before cosigning a loan. Consigning a loan makes you legally responsible for the bills. It also means that if the payments aren’t made on time, your credit report will be damaged – up to seven years.
- Check your credit record regularly and investigate any suspicious inquiries or accounts immediately. Close any accounts for which you cosigned but no longer wish to be responsible (when your child graduates from college, for example).
- Talk with your kids about credit early, before college when they may soon be inundated with offers. Show them how interest and minimum payments work, and explain credit reports. If you lend them money, charge them a small amount of interest and force them to make regular payments.
◗ Take debt seriously and try to help your child do the same.
Remember “Enablers are the worst enemies of the very people they love the most.” – Earnie Larsen and Carol Larsen Hegarty.