Expert Answer: Should You Let a Family Member Pay Off Your Debt?



Ours is a nation in debt, with the average American at least $90,000 in the red. Today, with inflation driving up the costs of everyday consumer goods, consumers are increasingly relying on credit cards to help them weather the storm.

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Meanwhile, homes are getting more expensive, the cost of education is skyrocketing, and a global recession looks increasingly likely. How to get out of all this?

You could simply turn to a family member to pay off your debt. But is it a wise decision? When and how to resort to this type of bailout? And what should the ground rules be?

GOBankingRates turned to financial experts to find out if you should let a family member pay off your debt.

Ask yourself these questions first

Before you even start wondering if a family member should pay off your debt, Mariana Martinez, Senior Family Dynamics Consultant at Wells Fargo Wealth and Investment Managementencourages people to ask themselves the following questions:

  • What is the relationship between you and the family member offering to pay off your debt? are you close? Is the relationship strained?
  • Who approached whom regarding the offer?
  • How will this offer affect the giver? Is it a form of inheritance? Or is it coming from their savings and could it hurt their retirement plan?
  • What are the circumstances surrounding the debt: Is it your mortgage? Student loan? Gambling debt? Medical fees? Credit card debt due to overspending?
  • What are the consequences of debt? For example, is it a serious circumstance such as foreclosure or do you feel more comfortable without the debt?
  • Why don’t you repay the debt yourself? For example, did you lose your job? Or is it due to poor judgment?
  • What is the probability of this happening again? Is it already a model?
  • What are your other options? Are you able to pay the debt if you reduce your expenses, sell a property or work more hours, for example?

By taking the time to sit down and answer these questions, you should be able to determine if this is a good idea. For example, if your relationship is strained and/or your debt is the result of your own carelessness, you’re better off taking responsibility for the debt without any handouts.

Evaluate your options

“Before turning to your family, it is essential to carefully assess your options to find the most appropriate way to pay off the debt,” said Michael Throckmorton, financial expert at Merchant Cash Advance. “If there’s another way to pay off the debt, it’s worth exploring your options. If you are considering a family, it should ultimately depend on how close you are to the family member and their secure financial position to help you pay off the debt.

Make it a win-win for both of you

“I would recommend that clients allow their family members to pay off their debts [only] if they could make it a win-win for both parties,” said Brendan Sheehan, MSFP, CFP, Managing Director of Waymark Wealth Management. “In other words, if you’re earning a good, reliable income, but you’ve accumulated high-interest debt, ask a family member to pay off your debt.

“In exchange for their generosity, you can repay them over time with a better interest rate than they are currently receiving. For example, if you have $10,000 in credit card debt at 10%, ask a family member to pay it off using their excess cash in the bank and you will pay it off over time and credit them 3 % per year. This is a higher interest rate than they can earn in the bank, and it will save you at least $700 net every year you keep the $10,000 balance.

Talk it over

Either way, you absolutely need a clear and mature conversation about the debt repayment plan.

“You need to make sure there’s a detailed conversation about the gift and its purposes,” said Bryan Curry, CFP, partner and retirement planner at Bridging the Gap Retirement Planners, LLC. “If this does not happen, both parties may be disappointed with how the funds are actually used.”

You also need to be very clear about whether it is a grant or a loan.

Write a contract

“Although a contract may seem somewhat formal with a family member, it helps to provide a legal basis and guidance if things go wrong in the future – for example, if they want a refund in the future. future or if they suddenly decide to demand the money they [gave you]said Bill Ryze, Certified Chartered Financial Consultant and Advisor to the Board of Directors of Fiona. “All conditions must be stipulated and noted, and signed by both parties.”

Choose the path that makes you stronger

“Whether you accept the offer to pay off your debt or pay it off yourself, I hope the decision makes you feel more mature and capable in the end,” Martinez said.

While the experts are on the whole wary, they’re not necessarily against letting a family member pay off your debt. They just want you to be super careful and thoughtful.

“Money and family is always a delicate situation,” Curry said. “However, giving and helping the family can be extremely rewarding for all parties if done with care and with clear and open communication.”

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