QUESTION: Ken’s wife has just gone back to school, and they have to get student loans. They also have an interest-only loan on their home. Should they pay that off and take out the student loans? Or should they focus their finances on paying cash for school first? What about refinancing?
ANSWER: The first rule for getting out of debt is to stop borrowing more. The second rule is to start working on the debts you already have. You have to draw a line and say you’re not using debt for anything for any reason.
When you start working on your current debts, you have to start with the smallest and work your way up to the biggest debt you have.
You should refinance your home to get rid of the adjustable rate and to get it to a 15-year fixed rate loan. Then you should pay off your $1,500 student loan, finish your fully-funded emergency savings, and continue on with the Baby Steps.
QUESTION: Julie has power-of-attorney for her parents who are in an assisted living facility. They have no money, no assets and lots of debt. What can Julie do?
ANSWER: You need to tell them that if they ever borrow money again it is considered stealing because they have no way to pay back what they owe. You have to be willing to have that talk with them first and foremost. You also need to take their credit cards and close the accounts since you have power of attorney.
You also need to explain your parents’ situation to all of these companies. Your parents are considered “judgment proof,” which means these credit companies aren’t going to be able to get any money from them. They can sue them or trash their credit, but it won’t matter because it is uncollectible debt.
If you and your siblings want to get together to settle this debt in order to keep your parents’ name in good stead, you’ll probably be able to settle for a very small amount – probably pennies on the dollar. Just make sure you get the settlement in writing before you give them a dime.
QUESTION: Rebecca wants to pay off debt using her husband’s $300,000 trust fund, but he doesn’t want to touch the money. He wants to use it for their kids’ college education. What should they do with the trust fund money?
ANSWER: You’ve got more than enough to pay off your debt and fund your kids’ college education and that’s what you should do.
The only problem is that you have a bad set of money habits. If you use the trust money and keep your old habits, you’ll be right back where you were before you got the trust fund. You need to go through Financial Peace University and apply new money habits that will change your family tree for good.