Family debt question

[Goldy]

Hi,

After going down to the inlaws for the holidays my mother in law hinted that they had some substancial CC debt. After everything was over for the holidays I asked her if she would like some help with that debt and she was super grateful. Here are the numbers...

House 16,000 @ 9%
CC1 1,000 @ 22%
CC2 8,000 @ 16%
CC3 12,000 @ 15%
CC4 2,500 @ 4.9%

They make a combined take home income of about 2200 per month and are planning to retire in 4 years. The house payment is about 150 per month right now.

What should they do with that CC debt? I was thinking they should take out a loan to pay off the CC's and get that interest rate much lower.

Thanks

[sfalexi]

I think the loan idea isn't a bad idea. The problem is that when the loan is changed, if you got a good rate, the minimum payment may go down. And then they may be tempted to pay the NEW minimum payment, and spend the rest. Which isn't helping the problem, just dragging it out.

Best bet is to do a budget and see what they're living expenses are. Four years (if they take in 2200 and their house is 150 a month, and assuming no other real debt besides general living expenses of food, electricity, etc.) is probably enough time to pay off all those credit cards. If they can afford 1000 a month towards bills, it should be done in under four years.

Alexi

[jIM_Ohio]

Hi,

After going down to the inlaws for the holidays my mother in law hinted that they had some substancial CC debt. After everything was over for the holidays I asked her if she would like some help with that debt and she was super grateful. Here are the numbers...

House 16,000 @ 9%
CC1 1,000 @ 22%
CC2 8,000 @ 16%
CC3 12,000 @ 15%
CC4 2,500 @ 4.9%

They make a combined take home income of about 2200 per month and are planning to retire in 4 years. The house payment is about 150 per month right now.

What should they do with that CC debt? I was thinking they should take out a loan to pay off the CC's and get that interest rate much lower.

Thanks

Before I even read the comment you suggest a loan to consolidate, that was my first impression too.

I would consider
a) getting a HELOC and putting all debt on HELOC
b) refinancing whole house, and taking 25k cash out to cover the debt (9% first mortgage is also too high)
c) putting all debt on the 4.9% credit card and focusing all efforts to one card and one card only.

I would also do a spending analysis to treat the root cause- just because the debt goes away does not mean the problem goes away.

[minnie1928]

I would also do a spending analysis to treat the root cause- just because the debt goes away does not mean the problem goes away.

I agree...that's an awful lot of debt considering their housing expense is so low (so in theory they should have more cash for other expenses). Do you know what was purchased with the credit cards? Are we talking medical bills or just random stuff that they thought they had to have? I think there may be more here than meets the eye.

[EconoMutt]

I'd be afraid they would transfer their debt to the Home Equity Loan and then rack up more credit card debt.

[disneysteve]

They make $26,400/year, have $40,000 in debt and plan to retire in 4 years. How exactly are they expecting to do that? The only way possible is if they have substantial savings. If they have substantial savings, why do they have all the debt? If they don't have substantial savings, how are they planning to retire?

[Goldy]

26k is thier take home after taxes.

This debt has slowly accumulated over about 20 years so I think it just snowballed and now they are in serious trouble. They live a very modest lifestyle with two older cars and a nice house worth 53k.

I told them about the dangers of getting a loan for the CC's, mainly that they need to chop up the cards and NEVER use them again. They have never heard of a debit card but I think that would be a great idea for them becuase they use checks whenever they can but since no one takes checkes anymore they had to use a CC.

In my opinion they should get a HELOC for the cc's but keep the house payment seperate because its only 150 a month and they will be able to keep up with that payment when they are collecting Social Security and pensions. That leaves 24k to pay off before retirement. Does that sound like a reasonable plan?

[Seeker]

26k is thier take home after taxes.

This debt has slowly accumulated over about 20 years so I think it just snowballed and now they are in serious trouble. They live a very modest lifestyle with two older cars and a nice house worth 53k.

I told them about the dangers of getting a loan for the CC's, mainly that they need to chop up the cards and NEVER use them again. They have never heard of a debit card but I think that would be a great idea for them becuase they use checks whenever they can but since no one takes checkes anymore they had to use a CC.

In my opinion they should get a HELOC for the cc's but keep the house payment seperate because its only 150 a month and they will be able to keep up with that payment when they are collecting Social Security and pensions. That leaves 24k to pay off before retirement. Does that sound like a reasonable plan?

Goldy,

The real problem here is that there's no listed expenses. With a mortgage of 150/month, you're talking less than 2k per year (many peope here pay 2k for two months rent, some pay 2k in one month). With an income of 26K clear, and only 2k a year going to mortgage, where is the rest of their income going? Why cannot they pay down these CCs expenses themselves with their income? Where is the money being spent?

It's fine to take a HELOC and clear their CC bills, but the problem is just going to reoccur if nobody gets an inkling of what their expenses are.

[maat55]

The heloc will likely have an higher rate. I would consider a refi.

Do they have additional retirement funds?

If they tighten the budget, they should be able to pay off the refi withing 5 years. Extending retirement a little longer may be worth it.

The key will be to stop using the CC's.

[Seeker]

They owe 16k on a house now worth 53k.

Their income is 26k/year and they pay 2K/year for the first mortgage.

They have 24k to spend per year from income. Or say 2k per month.

Monthly food bill?
Monthly Utilities?
Insurances/maintenance/repair?
Gasoline?

There's no way that I could spend 2k per month outside of housing costs. These people apparently have 2k per month and cannot pay CCs???

If they refinance or get a HELOC where will be the money to pay for the house then? Yes, they can erase the CC debts by taking 25k or so out of the house.

But if they are "in trouble" and connot meet their current expenses with 2k per month then how is it expected for them to add payments to the house refi or HELOC to their current expenses????

Without knowing expenses, it would be a mistake to put their home at risk.

Goldy, Debit Cards would be no different than CCs. They may be paying more overdraft fees if they do not keep track of spending. "Spending" may be their entire problem.

[Snodog]

There's no way that I could spend 2k per month outside of housing costs.

Really? Maybe you are single? For two people 2k goes pretty fast. Wife and I spend about $3000/month oustide of house payment and I consider ourselves extremely frugal. I don't know how any couple could live on 2k.

I think the problem for this couple is just not enough income.

[disneysteve]

There's no way that I could spend 2k per month outside of housing costs.

In another thread on a different topic, I posted this:

I easily came up with $25,000 in annual spending including just the following:
property taxes
home, auto and life insurance
utilities
medical insurance
college savings
synagogue dues
religious school tuition

That doesn't include things like gas, auto maintenance, food, clothing, travel, gifts, cell phones, home maintenance, charitable giving and many other things.

A couple of things on that list (property taxes and home insurance) fall under housing, but none of the others do. I wasn't sure if you were counting utilities among housing costs. My point is that the list is just over 2K/month and doesn't include a whole lot of regular items mentioned after the list. So 2K/month is quite easy to spend beyond housing costs. Most people in this area probably are over that mark.

[disneysteve]

The real problem here is that there's no listed expenses. With a mortgage of 150/month, you're talking less than 2k per year (many peope here pay 2k for two months rent, some pay 2k in one month). With an income of 26K clear, and only 2k a year going to mortgage, where is the rest of their income going? Why cannot they pay down these CCs expenses themselves with their income? Where is the money being spent?

Same questions from me. Without knowing their whole situation, it is impossible for any of us to say what the proper course of action is. Personally, I think they need to get themselves debt-free before they consider retiring. Going into retirement with debt is not such a good idea.

[Snodog]

A couple of things on that list (property taxes and home insurance) fall under housing, but none of the others do. I wasn't sure if you were counting utilities among housing costs.

I assumed Seeker meant $2000 sans ONLY the house payment since that is what the couple in the OP were dealing with. I guess its possible but we would have to make drastic changes to cut another grand out of our budget. I guess we could pick berries and live off the land. Homemaid squirrel jerky anyone??

[Snodog]

I easily came up with $25,000 in annual spending including just the following:
property taxes
home, auto and life insurance
utilities
medical insurance
college savings
synagogue dues
religious school tuition

That doesn't include things like gas, auto maintenance, food, clothing, travel, gifts, cell phones, home maintenance, charitable giving and many other things.

Yep, its amazing how quickly stuff adds up.

Car replacment is another thing people forget about (they don't last forever). That alone is about $250 for us and we drive cheap econoboxes.