How to Help a Loved One in Financial Distress

Perhaps you’ve received the call. Your sister is on the phone, upset; her car is in the shop and she doesn’t have the money to pay for repairs. Her credit cards are maxed out and she can’t get to work tomorrow without a car. You have a feeling of déjà vu, because this isn’t the first time this has happened. You’re angry, she’s angry. You resent the imposition, she resents your advantages and success.

You agree to call the repair shop and pay for the repairs. She promises to pay you back.

Money conversations are often uncomfortable, especially when wrapped in family dynamics and the stress of an emergency. You may also feel conflicted due to the pandemic, which has impacted everyone so unevenly. This could create a sense of obligation if you’ve done relatively well financially. You may also worry about supporting bad habits or creating a sense of dependency.

Financial distress and tough conversations about money both trigger unpleasant emotions. Trying to avoid these feelings usually just makes things worse. You and your loved one will benefit from sharing your feelings about the situation. You both will feel fear and anger, and sadness. You may resent being put in this difficult situation (again) while your loved one feels hopeless. Enter shame and guilt. However, by listening with an open mind you can both feel heard.

“Not everything that is faced can be changed, but nothing can be changed until it is faced.” ~ James Baldwin

If you’re willing to consider new possibilities (beyond blame and shame), you can take care of yourself and discover effective ways to help. If you’re frustrated, extend compassion to yourself as well as the other. As they say, put on your own oxygen mask before helping others.

Money problems come in a variety of flavors and fall along a continuum of severity. Perhaps it’s a young person who received an unexpected bill but just hasn’t built up an emergency fund. Or, someone is facing unemployment and a crushing debt burden. Different challenges call for different resources.

Resources for outside help

Seek outside help when the problem is more than you can handle. If the issue is income (not enough money coming in), career coaching might help someone get a better job. Maybe they need information and encouragement to find social or insurance benefits they’re entitled to.

Financial coaching or counseling helps people develop the skills they need to manage their finances more effectively. Managing money is a matter of combining knowledge with the behaviors needed to make good decisions. The Association for Financial Counseling & Planning Education – here – trains and certifies coaches and counselors to help people develop healthy relationships with money.

Credit Counseling Agencies (CCAs) are nonprofits who work with debtors on budgeting and creating a Debt Management Plan. Debtors pay a monthly service fee and payments go into a trust and the CCA then uses the money to pay creditors. The Debt Management Plan pays off the debt within five years.

CCAs are appropriate for people who can afford to pay their debt and need support on planning and handling money. The National Foundation for Credit Counseling – here – offers resources and referrals to member agencies.

Debt Settlement Companies (DSCs) are nonprofits that redirect a client’s monthly payments into a trust until there is enough money to negotiate a settlement with creditors for a portion of the debt owed. The forgiven debt is generally taxable and old debt remains on a credit report for seven years.

It’s important to carefully read the agreements and understand fees and expenses for both CCAs and DSCs. You may pay substantial fees before any debt is reduced. Confirm that all debts are included in the plan.

People should speak with a qualified attorney to assess their situation when credit counseling or debt settlement isn’t enough. The attorney reviews the situation, including a proposed debt management or debt settlement plan (if a plan has been attempted). Where bankruptcy is appropriate, Chapter 7 (liquidation) offers people a fresh start that eliminates all debt except student loans, child support and alimony, and most taxes. What one pays depends on their income and what they own.

If someone doesn’t qualify for Chapter 7 or wants to keep their possessions, Chapter 13 (reorganization) allows them to propose a three- to five-year repayment plan to pay all or part of their debt. It’s more like debt consolidation. If they abide by the terms of the plan, remaining debt other than student loan debt will be discharged at the end. Chapter 13 is the best way for a homeowner to avoid foreclosure.

Reputable attorneys generally offer a free consultation to review the debtor’s situation and recommend the most appropriate solution (which might not be bankruptcy at all). Be sure to gather all relevant data on assets, liabilities, and household income before meeting.

Taking action

“If I had an hour to solve a problem, I'd spend 55 minutes thinking about the problem and 5 minutes thinking about solutions.” ― Albert Einstein (attributed)

Once you’ve gathered information about the situation and resources, consider ways that you can help. That means, of course, being realistic about your capacity (time, money, emotional energy) and setting clear boundaries. Maybe the most you can do is share information and be an empathetic listener. You might wish to and be able to provide financial support. If so, how much control do you want to exert? You probably want your loved one to maintain their dignity and self-esteem, but don’t want to become their ATM. Create conversations that are open and collaborative so your loved one feels understood and cared for, and not manipulated.

Open conversations about feelings and laying out ground rules about how and when you want to talk about this topic. Ask, “What does success look like for us?” Keep in mind goals bigger than financial matters. How can you tend to your relationship?

There are various ways to help create better long-term outcomes. For example, paying for all or part of the cost of career counseling could change the trajectory of someone’s earning power. People in distress tend to wait too long to seek the help they need because they think they can’t afford it. You might see the wisdom in paying for counseling (as mentioned above) or even a consultation with an attorney sooner rather than later.

If you are able and want to help financially, consider strategies that will effectively help with the immediate problem and tend to your longer-term goals. If you choose to simply take care of the problem and move on, that’s fine. If your financial capacity is more limited – by choice or necessity – think about ways to leverage it.

Those with moderate money problems may benefit from financial counseling or coaching. This could be a great opportunity to invest in their future – and your relationship – so long as they are actively engaged with the learning.

If your loved one is working on a debt management plan, you might offer incentives, such as matching (say, dollar-for-dollar or even cents on the dollar). The plan is less burdensome when someone is helping carry the load. A “bonus” could be effective as well; for instance, once your loved one has paid 60% (or 90%) of their debt, you agree to pay the rest.

Qualified legal counsel is crucial when there is severe distress. This is when legal help seems most unaffordable, but in reality, they can’t afford not to have a lawyer. This is an obvious way to help.

If you and your loved one agree that a loan is most appropriate, you could decide to forgive portions of the loan over time (a personal loan should be documented with a promissory note). Keep in mind that gifts (including loan forgiveness) over $15,000 per year per person are subject to gift-tax rules. While most people won’t owe gift tax, it is important to properly document larger gifts with gift-tax returns.

It’s a blessing to be able to help those in need. You’re most effective when you appreciate the financial situation as well as your loved one’s emotional needs. Leverage your ability with outside help to take care of what’s most important – including yourself.

The opinions expressed by the featured author are their own and may not accurately reflect those of Buckingham Strategic Wealth?. This article is for general information only and is not intended to serve as specific financial, accounting, legal, or tax advice. IRN-21-2227