How should I advise this friend?

[jimmyrules712]

Hi. I have a friend who recently asked for me advise on his situation and I wasn't sure how to help him so I thought I'd check here.

All of this was done either against my advice or without me knowing at all. I already know the story is full of stupid mistakes, no need to point that out. I'm just looking for the best path forward for him.

He took a lien against his car to borrow around $10k and loaned it to a friend of his who was starting a business. Then later on put $15k on credit cards to help the same friend/business buy supplies. The friend/business hasn't failed, but it's hardly profitable. They're giving my friend exactly enough money to make the minimum payments on the credit cards every month and that's it.

When he realized his friend's business may not work out or ever be able to pay him back my friend then withdrew his entire 401k balance (around $15k) and used it to pay off the car lien and some other stuff. So now he's stuck with the $15k CC debt and since he and his wife combined make less than $35k a year with their first baby on the way it's going to be difficult for them to ever pay the debt off.

So they have the $15k CC debt and no other debt except their mortgage. They bought their house at the height of the housing bubble so their mortgage is for $90k but the house is only valued at $65k now and they've paid $10k on the loan but it's balance is still higher than the home value. No car loans but both of their cars are sort of on their last legs and one may need to be replaced soon.

So the main thing I'm trying to figure out for him is how to best manage and pay off the CC debt. They don't have much of value they can sell and the debt all went to this business that doesn't have anything of tangible value they could take and sell.

[jpg7n16]

He and his wife combined make less than $35k a year with their first baby on the way it's going to be difficult for them to ever pay the debt off.

Increase income. 2nd or 3rd jobs if needed.

they've only got like $10k in equity, so they still owe more than the house is worth.

Either you misunderstood, or something's just wrong with this statement.

It is impossible to have $10k of equity, if you owe more than the house is worth.

Assets - Liabilities = Equity
$65k house - mortgage = $10k equity; then mortgage = $55k - which is not more than the house is worth.

By definition, in order to have equity, you must owe less than it's worth.

So the main thing I'm trying to figure out for him is how to best manage and pay off the CC debt. They don't have much of value they can sell and the debt all went to this business that doesn't have anything of tangible value they could take and sell.

They have to increase their income somehow. That's really the best solution. And yeah maybe it'll suck having to work multiple jobs, but that's the price of making an extremely risky investment with all your life savings, and then leveraging it by borrowing.

[bjl584]

1) Increase income with extra work/jobs.
2) Cut back expenses as much as possible by eating out less, cancelling cable, etc.
3) Don't ever jeopardize their own future to help anyone ever again.

[disneysteve]

So they are upside down on their home, have no savings and owe 15K on their CC with an income of less than 35K. I agree with JPG. They need to boost income.

Does the friend who started the business have any assets? They could try to go after him somehow. If the business has no tangible assets, where did all the money go? Is there no equipment, office supplies, inventory, etc? Or did the money just go for rent or payroll?

[jimmyrules712]

Increase income. 2nd or 3rd jobs if needed.


Either you misunderstood, or something's just wrong with this statement.

It is impossible to have $10k of equity, if you owe more than the house is worth.

Assets - Liabilities = Equity
$65k house - mortgage = $10k equity; then mortgage = $55k - which is not more than the house is worth.

By definition, in order to have equity, you must owe less than it's worth.


They have to increase their income somehow. That's really the best solution. And yeah maybe it'll suck having to work multiple jobs, but that's the price of making an extremely risky investment with all your life savings, and then leveraging it by borrowing.

I mis-typed it. They've paid $10k on the loan. SO they still owe $80k on a $90k mortgage for a house worth $65k

So they are upside down on their home, have no savings and owe 15K on their CC with an income of less than 35K. I agree with JPG. They need to boost income.

Does the friend who started the business have any assets? They could try to go after him somehow. If the business has no tangible assets, where did all the money go? Is there no equipment, office supplies, inventory, etc? Or did the money just go for rent or payroll?

The guy who started the business has personal assets but since my friend uses his own personal credit card to pay for stuff I don't think he has any leverage to take the business-starter's personal assets. The money was used to buy the stock products that they are trying to sell.

I'll also add that neither the husband or wife went to college, so currently their earnings potential isn't extremely high.

[disneysteve]

this business that doesn't have anything of tangible value they could take and sell.

The money was used to buy the stock products that they are trying to sell.

You contradicted yourself. First you said the business has nothing tangible to sell, then you said the money was used to buy stock products to sell. If the business owner isn't able to sell the product, let him "repay" your friend by giving him the stock. Then your friend can sell it and at least recoup some of his investment.

I'll also add that neither the husband or wife went to college, so currently their earnings potential isn't extremely high.

That's a cop-out. If they believe it to be true, it will be true. If, instead, they believe they are capable of doing better, then they will go out and find a way to do better. There are loads of successful people who don't have college degrees.

[jimmyrules712]

You contradicted yourself. First you said the business has nothing tangible to sell, then you said the money was used to buy stock products to sell. If the business owner isn't able to sell the product, let him "repay" your friend by giving him the stock. Then your friend can sell it and at least recoup some of his investment.

That's a cop-out. If they believe it to be true, it will be true. If, instead, they believe they are capable of doing better, then they will go out and find a way to do better. There are loads of successful people who don't have college degrees.

What I meant was the business doesn't have any assets like real estate, vehicles, furniture, etc. All they have are their "products" and the rest of the money I'm assuming went to expenses that are sunk costs (like the rent for their building).

Either way I don't think he's willing to force the business to fail yet. There's still a chance that it becomes more profitable.

[disneysteve]

Either way I don't think he's willing to force the business to fail yet. There's still a chance that it becomes more profitable.

Is your friend involved in the business at all? Since he invested a fair amount, he ought to have some say in how things are run. Maybe the guy running the business doesn't know what he's doing and your friend could go in and help him boost sales.

Bottom line, if the repayment won't come from the business, the only other options are cutting personal expenses or boosting personal income.

[Redraidernurse]

Really the only option I see is him taking on a 2nd or 3rd job - even if he is earning minimum wage. If he is currently working only 40 hours a week he could easily boost that up to 80+ hours a week. He needs to Man Up and take responsibility to provide for his future child and wife, even if that means seeing them less because he is working more. You do what you have to do. Especially when you make ignorant mistakes.

[couchrobt]

1) Increase income with extra work/jobs.
2) Cut back expenses as much as possible by eating out less, cancelling cable, etc.
3) Don't ever jeopardize their own future to help anyone ever again.

This is the best way. Tough it may sound like but it is the best. A few sacrifices shall be made where you like it or not. It was a mistake made, this is the consequence. And to the friend whom he had helped, hopeful that he get a little light in his mind and pay some. True for #3. It is not a crime to say no to helping someone if you will put your own into the pit, especially when you have a family. A lesson to all.

[canada94]

Maybe he should talk the situation over with his friend, the business may be in a position now for some type of loan, he could then pay him the money back that he lent your friend.

Hope this helps


Kevin