Moving Parts: Family Obligations, Student Loans, and Holiday Wishes
December 10, 2017 9:25 AM   Subscribe

My in-laws are in serious debt, and among them are $70,000 worth of my wife's student loans. They have asked my wife to refinance this loan in her name and pay her back for the payments on the loan. However, with our combined salary of just at ~$60,000 before taxes, high-ish rent, $27,000 worth of grad school debt, car payments, and credit card bills- this feels like a precarious proposition. Should we take on this loan, and is there a way out for my family? Many snowflakes inside.

My in-laws have been struggling for the last six years or so. My father-in-law, who owned a small construction business in a rural area for many years, was stiffed on a big job which forced him to close his business, leaving him with ~$70,000 of unresolved business debts. My mother-in-law, who is an incredible person and homemaker, was married immediately after high school, has no work experience, and is computer illiterate.

Only a month or so after the construction business closed, my father-in-law took a job driving semi trucks. A combination of poorly managed diabetes, stress, long hours, exhaustion, and malnutrition lead him to be hospitalized after a few weeks with ketoacidosis. A portion of his left foot was amputated, which has left him with balance issues and reduced mobility. During this time, they also incurred over $200,000 worth of hospital debt, as neither of them had insurance.

They sold their house and bought a trailer home to follow work opportunities, as he now works as a licensed insurance claims adjuster with State Farm. His salary is around $120,000 a year, but is again working 12 hour shifts 6-7 days a week causing his health to deteriorate. What he does make goes towards their RV rent, his business loans, car payments on two cars and the trailer, medical debt, and my wife's Parent PLUS student loans, which are listed in their name.

The US Department of Education has declined to renegotiate the loan despite numerous attempts at discussing different payment plans. Right now, they are being asked to pay $950 a month, but they are only able to pay $200-$300 a month. The rate of interest on this and other loans they have is such that the debt is rising faster than they are able to pay it off.

This brings us up to now. Their credit is in the 400-500 range, and they are under the impression that because of his salary they would be unable to file for bankruptcy. (Is this true?) They are asking us to try to refinance her student loans in her name, and they will send us the money to make the payments. With my father-in-law's health, and being their sole breadwinner, we are concerned that this may not be a workable long-term solution.

They are our family, and though we would like to help as much as we can, we feel like we're barely keeping our heads above water as it is. My wife just started working, so we're only now seeing how our budgets will shake out, but thus far, we've been breaking about even. I'm not sure that we would be able to keep up if we had to assume all of the financial responsibility.

My questions are-

1. Could we refinance $70,000 worth of loans low enough that we could pay them off if it were just us making the payments?

2. Is there a way out for my in-laws? We would like to help them, but I've read enough here on the green to know that throwing more money at the problem is rarely a solution. Do they need a lawyer? Are there programs available that can help them? I'll watch this thread and answer any questions that I can, but my holiday wish would be to try to help them find a solution to this.
posted by Krazor to Work & Money (21 answers total) 1 user marked this as a favorite
Don't do anything until your in laws have consulted a reputable bankruptcy attorney. Income has nothing to do with ability to file for bankruptcy.

The Parent PLUS loans are not dischargeable during bankruptcy but payments would go on hold (though interest would accrue.) This is depressing but possibly relevant - my understanding is that a Parent PLUS loan would be discharged if either the student (your wife) OR the borrower (your father-in-law) passes away. Hopefully he has his health issues under control now and lives a long and happy life, but this is an example of a factor you need to consider.

Changing the type of debt can have far reaching consequences. Consult experts - multiple ones - before making major, life altering financial decisions. Work with your in laws to discover the best solution for everyone.
posted by cessair at 9:51 AM on December 10, 2017 [5 favorites]

Income has nothing to do with ability to file for bankruptcy.

Woah, this is really not true. Income is really important in consumer bankruptcy. It might be worth a short (cheap) consultation with a bankruptcy attorney to determine their ability to file bankruptcy definitively. In that case, you should find an attorney and make it very clear that you will NOT be using that attorney for the filing, no matter what happens. This will keep them from guiding you towards a useless or $$$ filing.

You can get reasonable, reliable information about consumer bankruptcy by grabbing a book like NOLO's guide to bankruptcy and working through it carefully.
posted by Rock 'em Sock 'em at 9:55 AM on December 10, 2017 [1 favorite]

Bankruptcy may be an option. They need to see a bankruptcy lawyer. This is a bit more complicated because part of their debt is business debt.

There are two bankruptcy options, Chapter 7 and Chapter 13. Chapter 7 eliminates all of your debts, but as you mentioned, they may not be eligible because of their income. But Chapter 13 is still an option. It allows them to reduce some of their debts and pay others off in a three to five year period. It will keep creditors off their back and guarantee a reasonable payment plan supervised by the court. It means living on a severely reduced income but having a clean slate after three to five years.

You should not do anything concerning the Parent Plus loan until consulting a bankruptcy lawyer.
posted by JackFlash at 9:58 AM on December 10, 2017 [2 favorites]

Best answer: OP, you should only take on these loans if you're completely fine with taking on the payments for the foreseeable future. The only way to know what rates you could get is to shop around. However, I'd only do so with the assumption that you will not be paid by your wife's parents. It sounds like you can't afford that, so the answer here needs to be no.

The reality is that they needed to file for bankruptcy before your father-in-law got this job. But given that they didn't, they should be prioritizing payments for the one debt that they will not be able to discharge in a future bankruptcy --- the student loan debt.

If I were them, I would not pay anything at all on the medical debt or the business debts. I would also, if I were your father-in-law, stop working 6-7 days a week and try to work a manageable job that allows him to pay the debts that (typically) really matter: a mortgage, if there is one, rent if not. An auto loan, if there is one. And student loans. Other than that, I'd think fondly about my creditors, but I certainly wouldn't make myself sick trying to pay them. Just me, though.
posted by Rock 'em Sock 'em at 10:06 AM on December 10, 2017 [5 favorites]

ut Chapter 13 is still an option. It allows them to reduce some of their debts and pay others off in a three to five year period. It will keep creditors off their back and guarantee a reasonable payment plan supervised by the court. It means living on a severely reduced income but having a clean slate after three to five years.

Two thirds of chapter 13 debtors do not make it through the plan successfully. The reasonableness of the plan depends a lot on the court and is highly local (as is much of bankruptcy practice).

If your parents can't keep up with Chapter 13 payments they may end up owing the same debts and with interest accrued as if they'd never filed. In that case, they will have paid substantial administrative fees plus attorney's fees --- only to be back where they started. As you might imagine, the attorneys who get paid to set these up are NOT incentivized to give a shit about debtors long-term. They get their fees and they move on.

This is why it's important to get the advice of an attorney who you WILL NOT be using for the bankruptcy filing. Consumer bankruptcy attorneys are often unethical, crappy bad-advice factories that exist to churn out fees for bankruptcies that won't work or will leave the debtor worse off. You need to find someone without any incentive to get your parents to file.
posted by Rock 'em Sock 'em at 10:20 AM on December 10, 2017 [1 favorite]

For Reasons I was sitting through a bankruptcy court this past year, and can say that Chapter 13 bankruptcy absolutely does exist for people making a ton of money, and may be the best option. This is too much debt for them to handle even without the student loan debt.
posted by corb at 11:11 AM on December 10, 2017 [2 favorites]

As it is your wife's loans then yes, morally, you should be taking on the full $70,000 debt. I've been there and it sucks, but now is the time to each get a second job, minimise your expenses and throw everything you have at the $100,000 student loans. Shop around for consolidated loans (reading through the original loan agreements carefully). With a $100,000 loan you may be able to get deferments or lower payments until your income catches up to your expenses. I'm not sure them looking into bankruptcy would help you with your wife's loans, but it could certainly help them with all their other debts. Good luck. I know it seems overwhelming right now but they *can* be paid off.
posted by saucysault at 11:13 AM on December 10, 2017 [39 favorites]

I have no idea if this applies to your circumstances, but one thing you might look into are income-continent repayment plans. Some student loans have that option.
posted by salvia at 11:25 AM on December 10, 2017

Best answer: This is a difficult situation and I agree they should consult a lawyer. There are also reputable debt consolidation companies (including some non-profit ones) that may also be to help be negotiating on their (and your) behalf. Ethically I think you and your wife should take on the student loan debt, especially given your father's health problems. It probably should have been in your wife's name in the first place, as it was for her education, and she would have been able to defer payments during grad school without interest. You and your wife, despite your current income status, have a lot more earning potential than her father, who is in a worse financial situation than you and sounds like he's at risk of litetally working himself to death. But yes, I agree that if you to take on the debt be realistic about her parent's ability to contribute (I.e. they have none) and refinance so monthly payments are something you can afford.
Best wishes, it's a sad but unfortunately very common scenario, and there are resources out there to help.
posted by emd3737 at 11:34 AM on December 10, 2017 [9 favorites]

So, I think morally that your wife should pay for the loans for her education.

BUT my biggest question is if even with that debt removed are her her parents going to be able to realistically manage their debts and not default anyway?

Because their credit is already tanked, it can't get worse. They owe lots, cars, property RV, buisness debts and this would just be another loan on their 400 credit score.

If taking the loan will fix their problems then yes you should absolutely take it. If they are still going to end up in a mountain of debt, looking at bankruptcy , repossession, wage garnishment and other no good things, there really isn't areason to take on the debt for them at this time.
posted by AlexiaSky at 11:53 AM on December 10, 2017 [4 favorites]

Best answer: First, I'm so sorry for your parents-in-law's situation. It sounds like a later-life American nightmare. People should not have to end up in this kind of situation.

Second, you don't mention if you've even investigated the possibilities, but I would be surprised if, given your income and the amount involved, you could refinance the loan. So this may not even be an option. Even if you can, honestly, it sounds like it would like be overwhelming for you, leading you to be in similar financial difficulties. It may be better to have one family which is not stuck in some kind of formal repayment plan pegged to income, for reasons below.

Third, the Parent PLUS loans are most likely eligible for income-contingent repayment, but your father-in-law probably makes too much for it to lower their payments, as ICR is pegged to income, not to expenses. (It's worth running the figures through the repayment calculator on the Dept of Ed website [not elsewhere], as that will only take a few minutes, though.) If they're eligible and have not already done so, given the extreme financial pressure on them, it is probably a good idea for them to extend the term of the loan, which will reduce payments but mean greater repayment over the life of the loan. I would think they had already used this option, since they've talked to Ed, but playing around with the repayment calculator, the payment you give sounds much more like a 10-year term's payment than a longer one.

Whatever they do, they should stay away from any company that promises to lower their student loan payments or obtain any sort of forgiveness for them. THEY ARE ALL SCAMS. I can't stress this enough.

Fourth, yes, they can probably go through Chapter 13 bankruptcy and probably should. The difficulties have been mentioned above, so it's important for them to be realistic about whether they can do it. This will not discharge the student loans but will deal with the medical and other debt. Because they will be in straitened circumstances and extra income will be expected to go to repayment, I think it is better for everyone if you two are not also collapsing under the weight of either excessive debt or your own repayment plans. If YOU earn more money, you will be able to help them rather than having most of it go to one of the creditors. And you will generally have more flexibility to cut corners and help them with unexpected expenses.

Fifth, if for whatever reason bankruptcy won't work for them, they do need to prioritize the student loan payments over everything except, frankly, rent and other immediate living expenses. Here's why: medical debt, etc. creditors can sue them for nonpayment, but they have to go through the full process of obtaining a judgment. It will take a while, they can screw up, and there is some possibility of settlement. In most states, they can't intercept tax refunds (though they can go after the resulting assets, within the limits established by the state). Most importantly, even if they get a judgment, they will not be able to access your parents-in-law's government retirement or disability benefits. You don't mention how old they are, but they must be getting old enough that SS is on the nearish horizon, and your father-in-law may be forced onto disability sooner or later if his health remains poor. The federal government has no such restrictions. They can garnish wages administratively in a relatively short period of time, they will go after any assets, they intercept tax refunds basically automatically, and they can garnish federal retirement benefits. Basically, if you have to have a creditor holding a judgment against you, you want it to be a private company, not the federal government.

If I can think of anything else, I'll post it. Wishing your family all the best.
posted by praemunire at 11:59 AM on December 10, 2017 [11 favorites]

( the way, I'm assuming that your father-in-law actually did something to make himself personally liable for his company's debts, e.g., guaranteed them, or took out personal loans and put the money into the business, because if his business just borrowed the money, he would not be personally liable. The business would be.)
posted by praemunire at 12:05 PM on December 10, 2017

Your in-laws really need to gather the details on their debts and take them to a bankruptcy attorney. Some of the folks in this thread are unnecessarily negative about bankruptcy attorneys. Find one that your in-laws like and have them talk to that person. The attorney can review the business debt to see if it's even something your FIL should be personally liable for.

Good luck to them and you.
posted by LOLAttorney2009 at 12:15 PM on December 10, 2017 [1 favorite]

Don't do anything until they and you talk to a lawyer. One thing the bankruptcy court does is look back at the previous 6 months or so of finances. Signing over a big debt like that will get red flagged. It may be fine once explained, but I wouldn't do it unless it was part of an overall plan to improve their finances that was signed off on by a knowledgeable attorney.
posted by COD at 12:22 PM on December 10, 2017 [1 favorite]

Response by poster: Hey everyone. I truly can't begin to tell you how much I appreciate all of the advice you've given. Just what has been offered really makes me feel like I have a direction to work towards at the absolute least. To answer some recurring questions:

- My wife didn't pay for her undergrad in the first place because her parents insisted. She was the salutatorian of her graduating class, and was accepted to a good (read: expensive) university, so them paying for her classes was a reward for her work. They had done this arrangement successfully for her older brother when things had been going better for them. The hardship began during the second semester of my wife's senior year, and just never got better.

My wife offered to help at that time, but they're "southern proud" to a fault, and have only just now asked her to help, after years of refusing our offers. This year, we moved to a more expensive city, and are getting our feet underneath us, so this just wasn't a cost we were expecting.

- My father-in-law was the owner of the company that he founded himself, so I expect that most of the loans are in his name vs. the name of the company. When I say company, I'm referring to "tens of guys and a pick up truck with a logo."
posted by Krazor at 12:40 PM on December 10, 2017 [3 favorites]

It doesn't matter whether he personally guaranteed the loans, they are still dischargeable in a bankruptcy. You guys should refi the loans to your wife and your in-laws need to file. They should have filed years ago. Their situation is literally the reason the bankruptcy code exists.
posted by JPD at 1:43 PM on December 10, 2017 [3 favorites]

It doesn't matter whether he personally guaranteed the loans, they are still dischargeable in a bankruptcy

Yes, but if the loans were to the LLC and not to him, and he didn't take on some kind of guarantee, then the creditors of the company are not actually his creditors and he doesn't owe them personally anything. (And a personal bankruptcy wouldn't affect them.) I mentioned it only because sometimes people are old-fashioned about paying business debts when in fact the whole point of structuring your business as an LLC etc is that you are not wiped out personally when the business goes down.
posted by praemunire at 1:46 PM on December 10, 2017 [12 favorites]

Yes, but if the loans were to the LLC and not to him, and he didn't take on some kind of guarantee, then the creditors of the company are not actually his creditors and he doesn't owe them personally anything.

It is extremely rare for a bank to loan to a small business LLC without a personal guarantee or tangible assets pledged as collateral.

in fact the whole point of structuring your business as an LLC etc is that you are not wiped out personally when the business goes down.

This is a common misunderstanding regarding LLCs. They don't really protect you from debt because banks generally won't loan to an LLC without a personal guarantee. You often won't even get an office lease for an LLC without a personal signature.
posted by JackFlash at 2:31 PM on December 10, 2017

Best answer: OP, I don't want to get your hopes up, because there may well be some reason they're not eligible, but, playing around with the calculator, it looks like extending the term on the Parent PLUS loans (that is, going from the Standard plan to Extended Fixed) could cut their monthly payment by three hundred dollars or more.

This is a common misunderstanding regarding LLCs.

Huh? If the loans were to the LLC and no one made a personal guarantee, this is an accurate statement of the law. I specifically said I assumed that he had made such a personal guarantee (or structured loans to flow through him to the business in some other way) but was mentioning it just in case he hadn't but felt obliged to pay anyway--so there is no misunderstanding to correct. In such difficult circumstances, it's best to consider even the remotest possibilities, especially if the potential reward is high.
posted by praemunire at 2:55 PM on December 10, 2017

Best answer: Also, the NFCC is a non-profit (funded by Big Banking themselves in a disgusting got-you-by-both-ends kind of way) which can counsel you on debt-reduction strategies and generally obtain better repayment plans then they might offer you as an individual.

As several others here have noted, I would argue that it is definitely your moral responsibility to step up on these debts.

Make sure they have called each creditor individually and literally asked for the best repayment options--my understanding is that most creditors are happier to get something than nothing if you default.
posted by eglenner at 9:33 PM on December 10, 2017 [2 favorites]

I don't understand the rationale for moving the loan from their name to yours; the interest on the parent plus is likely to be cheaper than any personal loan on the market, which would be somewhere between 10-20% even with good credit (you mention in-law's rating, but what's yours?). Even a refi is unlikely to take it below 10%, last I checked.

You cannot actually afford such a loan. It is larger than your combined yearly salary and you already have other debt, including credit card debt if I'm understanding you correctly. Any payment should involve you paying on the loan, which remains in their name.

Based on the update, this is actually their debt, taken on knowingly and amidst at least some protest. Out of filial obligation I would certainly consider taking on the payments, or contributing as much as you can, but it would be a very bad idea for you to take on this debt.
posted by aspersioncast at 3:21 PM on December 11, 2017 [1 favorite]

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