Sunday, June 19, 2011

Mamas, don't let your babies grow up to be defaulters

His intentions were good. About seven years ago, a father, then 60, wanted to help his son, then in his late 30s, finance the small business he had started. Against his wife's advice, the father took out a home equity loan and borrowed just over $330,000 in his and his wife's name to loan their son.

During this time, the mother says, their son used the money to maintain "a very lavish lifestyle."

Initially, the son made a few payments on the borrowed money, but then he stopped. Soon, however, the son stopped making monthly payments on the debt. The bank sold off the debt to a collection firm.

The father and mother were on the hook for the money, since it had been borrowed against the value of their home.

The couple paid a lawyer roughly $2,500 to negotiate with the collection firm, which agreed to settle the $330,000-plus debt for $100,000. The couple paid off the $100,000 this past spring.

The son has tried, unsuccessfully so far, to get a loan under his own name, so he can pay back $100,000 to his parents.

The father, now in his late 60s, and the mother, now in her early 60s, are still working, but find themselves with a depleted nest egg and a tarnished credit rating because of their son's failure to honor his commitment to them to pay back the home equity loan.

The mother asks if their son owes them the $330,000 originally borrowed, or the $100,000 that the couple negotiated as a settlement.

Her husband keeps telling her that his accountant tells him that legally the son only owes them the $100,000. But she disagrees and wants to adjust his inheritance by the $330,000, "which would mean he would get very little."

"What is the fair and right thing to do?" the mother asks.

It's clear the mother is very upset with her son's behavior. But since she and her husband will only be out of pocket the $100,000 plus the $2,500 in legal fees, the right thing is for their son to repay them those amounts.

Granted, by defaulting on the loan payments, their son wrecked his parents' credit rating. But sadly, that's a risk they took by agreeing to put their house on the line for a loan they gave him on his fledging business.

His mother is upset that her son used the $330,000 in part to sustain his lavish lifestyle. But since she and her husband are only liable for $100,000 of that debt, that plus the legal fees are what they're owed.

If the parents want to adjust their son's inheritance, they can do that. They have the right to do whatever they want with their money.

But when they entered into the agreement with their son to borrow against the equity in their house to help him financially, they knew the risks they were taking when they did that. No adjustment to an inheritance will get their credit rating back or change how their son behaved once they loaned him the money.

Thankfully, the mother has gotten her husband to agree not to loan their son any more money to help him with his business.

Jeffrey L. Seglin, author of The Right Thing: Conscience, Profit and Personal Responsibility in Today's Business, is an associate professor at Emerson College in Boston, where he teaches writing and ethics.

Do you have ethical questions that you need answered? Send them to rightthing@omcast.net.

(c) 2011 JEFFREY L. SEGLIN. Distributed by Tribune Media Services, Inc.

7 comments:

William Jacobson said...

How appropriate that there might be biblical lessons directly on point!

Firstly from Matthew 6:12 "Forgive us our debts, as we have also forgiven our debtors" teaches us that it is wrong to expect mercy from those we owe money to without passing along the mercy received to others, so, yes, having been forgiven the majority of their debt, the parents should pass along that mercy to their son.

Secondly is the parable of the prodigal son, who also squandered an early inheritance. From this, feel free to disinherit him as he has already received and squandered his share but celebrate that you still have him in your lives.

Finally is Jesus's admonition after the Lord's prayer "For if you forgive others their trespasses, your heavenly Father will also forgive you, but if you do not forgive others their trespasses, neither will your Father forgive your trespasses".

Yes, show your son mercy and do not let this event drive you apart, but should you choose to disinherit him over this, then so be it.

William Jacobson, esq.

yawningdog said...

In the end, the parents put $330,000 of their money in their sons hands. They did that by taking a loan. He owes them what he took from them, the whole $330,000 minus whatever payments he made.

The parents paid only $100,000 to pay off the $330,000 - gee I wish I could get that deal. But this is again an additional amount of money out of their wallets. The original $330,000 loan should have been paid out of their son's wallet.

He owes them $432,500 minus whatever payments he had made.

William Jacobson, Cypress, CA said...

Yawningdog, the parents aren't out $432k... They are out $100k.. You would have them profit to the tune of $332k on this?!?

touchy feeley guy said...

Hang him from a tree with honey and let the bears have at him. And as may of his party favorites (women or men) as you can find.

ECS said...

Yes it is VERY far to reduce his inheritance-- and if he is a decent person he will think so too. My mother left more to my sister but forgave a loan (which was used by me be cause my husband had lost his job and I was working for him!) and I knew it was just.

Anonymous said...

The son owes his parents $430,000 minus any payments he made before he defaulted on his loan. He borrowed $330,000 which came from their savings. The parents had to pay $100,000, again from their savings, to settle the debt, so the parents savings were reduced by $430,000. If he is able to repay his parents for their losses - the $430,000 - then he is being fair to his parents.

If he cannot repay the $430,000 in full or in part, then he should ask his parents to reduce his inheritance by the $430,000 or whatever amount remains. Thus he will be fair to his siblings.

When he does either option, he will be fair to himself - he will be able to look at himself in the mirror and know he did the right thing.

Margaret said...

There is another cost to the parents in this article- the tax consequences of their negotiated settlement with the loan company. When the company agreed to accept $100,000, they are receiving the benefit of canceled debt of $230,000. The IRS considers this income to the couple. Depending on their other income,that could represent a large tax bill!

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