Ask the readers: How to face a family financial crisis?

With the arrival of the GRS staff writers, the semi-regular “ask the readers” column has a new home. Look for this feature most weekends. “Ask the readers” is your chance to get (and give) advice about real-life financial dilemmas.

An anonymous GRS reader submitted a question last week that hits close to home:

I have a family member that this past year has been in serious financial trouble. He is one of the most ambitious and intelligent people I know and I would have never imagined him getting in this kind of trouble. His ambition may have been his downfall as he keeps shooting for the stars and has fallen short on some of his business ideas, which may have put him in a more vulnerable position when the economy turned south.

He is now living in debt and struggling to put food on the table for his wife and four young boys. He has had to live on credit cards for several months and they are all maxed out. I have never seen first-hand anyone in this much trouble.

My question to you is, When faced with job loss and depleted savings, how can you avoid going into credit red? At what lengths would you go to to avoid living on credit cards and missing payments on just about everything? In the situation, is credit rating even worth anything?

As I say, this situation hits close to home. Last year, I wrote about my little brother, Tony. (I say “little brother”, but he's 36 now.) Tony's family got caught up in the mortgage mess, buying a home in Bend, Oregon at the height of the bubble — and before their home in Portland had sold. Six months earlier and things would have been fine. But things weren't fine. They couldn't sell either house. The market went to hell and they lost both homes to foreclosure.

Tony now faces circumstances similar to those described in the question above. He's learning that there's no easy solution to a family financial crisis. His father-in-law recommends “earning your way out of the problem”. That's a fine theory, but not always practical. Tony and his wife work hard, but they're only able to earn so much. I think that he — and people in similar situations — should also:

  • Cut spending to the bare minimum. This can be difficult. It can be tough to shift from normal spending to frugality, especially if you're accustomed to middle-class luxuries and a middle-class lifestyle. But when facing a financial crisis, it's imperative to reduce spending as much as possible and as soon as possible. You must stop the bleeding before you can treat the wound, before it can heal.
  • Consider drastic measures. Sometimes it's not enough to stop the bleeding. To stretch the metaphor, sometimes you need to amputate. If you're in a financial crisis, you may have to take drastic action, maybe even selling a car — or your home. Most people are unwilling to consider steps like these, which only leads them further into debt. These folks need to…
  • Be brutally honest. It's easy to say, “I'm in trouble now, but it's only for a month or two. I'll keep doing things as normal by using my credit cards.” If you find yourself in a financial crisis, try to take an objective look at your situation. Get outside advice from friends and family. Be willing to listen to what they tell you. Sometimes others are better able than we are to see the slack in our budgets.
  • Avoid touching retirement savings. When faced with financial peril, it's easy to look at the large sums sitting in your retirement accounts and think they'll provide the life preserver you need. In nearly every instance, though, you're merely postponing the pain. Your retirement savings are there to provide for you when you're no longer able to provide for yourself. They're not an emergency fund.

I'm sure that other Get Rich Slowly readers have family members in similar situations. Perhaps you're even struggling yourself (or have done so in the past). Based on your experience, what advice can you offer other folks who are struggling in this economy? What can be done to avoid sinking deeper and deeper into debt?

And as an ancillary question, what can we do to help family members in need? What should we do? I've told Kris that if Tony and his family find themselves in danger of living on the street, we'll make room for them in our house. But what about before that? At what point do I loan him money? (Or gift him money?) Or should I just be here to offer advice when he needs it?

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Mr. Not the Jet Set
Mr. Not the Jet Set

For the first question: “”When faced with job loss and depleted savings, how can you avoid going into credit red?”” The best offense is a good defense – the emergency fund. Also, one of the best ways to avoid credit card debt is to not have credit cards. for the second: “”What can be done to avoid sinking deeper and deeper into debt?”” Get out and get to work. Work 3-4 jobs. Cut to the bone and sell, sell, sell. Something I see a distinct lack of these days is a ‘sense of urgency’. This is survival mode. The answers… Read more »

Gordie Rogers
Gordie Rogers

I think going minimalist would help with being frugal. Sell or donate unnecessary possessions. Move to a smaller place, minimize use of your automobile, exercise at home and outside instead of paying monthly fees at a gym, don’t eat out.

I agree with Mr. Not the Jet Set. The best way is to avoid credit cards if possible altogether.

Sierra Black
Sierra Black

My family is just pulling out of the debt we slipped into when my kids were born and we dropped down to one income. My guest post here earlier this week talked about the big changes we made – changing jobs, selling our house in the suburbs, going down to one car – but we also did a lot of very tedious things like: – learning to track all our spending and become MUCH more frugal – starting side gigs that bring extra income each month – consolidating debt where possible to lower interest rates – sell Stuff and use… Read more »

kaitlyn
kaitlyn

I wish I had an answer to this. My mother lost her job back in March. It really knocked her sideways, coming shortly after divorcing my dad. I don’t want to support her by sending her money when she spent 5 months not even looking for a job, plus her financial habits leave much to be desired (I’ve learned how to handle money by doing the opposite of her…), but at the same time… she’s my mother. *sigh*

If she lost her house, I would take her in, but not her boyfriend (major point of contention for us).

robin
robin

I totally agree that a family has to drastically reduce spending, but many people don’t like to change their lifestyle of social activities or spending. Also making goals is important. I make sure that our family sets goals for what to pay and when… highest interest rate to lowest. I also look for better interest rates and shuffle money around . For example, we had a personal loan that was taken our for college and I moved it from Wells Fargo to our local credit union and got a 6% interest rate deduction. That’s going to save our family a… Read more »

Karen
Karen

I think the classic solution is to move back in with family. Sure, it may be harder for a family of 6, but really, what other option is there?

Dan
Dan

I don’t understand the “Avoid touching retirement savings” comment. So there’s what – a 10-20% penalty for taking some of your retirement money out early? Lets say you have several hundred thousand in retirement savings and you maxed out on credit cards. you might as well take what you need from retirement right? yes, you’ll need to live more frugually in your golden years depending more on social security, but overall I think it can make sense in some circumstances. Depending on what your APR is on your credit cards it could even make more sense than maxing out credit… Read more »

steve
steve

i agree, the best way to handle financial(or any other) crisis is to be prepared. i am that family member in a tough position so let me tell you want we need from our friends and family….. #1 encouragement #2 emotional support (call me to tell me you care about me, I’m not a leper, just unemployed!!) #3 offer up anything you feel you can do to help(make a meal, babysitting so I can take out my spouse for some alone time, etc) A Bit About Me: about 9 months ago i lost my career long position of 15 years… Read more »

Emmy
Emmy

I think at that point, the second point is the only one that will make a difference. Sell a car. Sell the house. Move into a tiny apartment. Get unemployment. get food stamps. Whatever’s eating your savings, get rid of it. Am I wrong in thinking that people in that situation aren’t exactly having steak every night? Frugality will only get you so far. And extra income is especially hard to come by in tough economic times. You can work every hour of the day and still not make enough money. In fact, I find this piece of advice to… Read more »

JonasAberg
JonasAberg

When (and how) do I help out a family member? Good question. I’d take a bullet for anyone in my family so this is something I’ve thought about too. I think for me at least, it boils down to *why* they’ve gotten themselves in debt. Is it because of a job loss or medical condition or something else outside their control OR is it just plain old stupidity and ignoring financial responsibility? If someone has gotten themselves in deep debt by buying “stuff” with their credit cards, it’s not going to help if I bail them out with money. Money… Read more »

Marc C
Marc C

I can relate- too well. In some ways I thought of myself while reading the description of this family member. I will add a better comment later. Right now I will say I have done everything I can to cut and face reality. That is a major part of it- as the first comment refers to it as survival mode. I would add that for all the comments about “get a job, get several”, for many people it is almost impossible. Someone who is an entrepreneur and “intelligent and ambitious” may even be more handicapped in this job market. I… Read more »

Brendan
Brendan

If you decide to lend them money do not expect to get it back as this way you will keep the friendship that has been built up.

Dan Dan Dan...
Dan Dan Dan...

Dan,

In response to your comment:

“I don’t understand the “Avoid touching retirement savings” comment.”

It NEVER makes sense to touch your retirement unless there is absolutely no other option. Not only do you lose the 10% – 20% penalty but you also lose the power of compounding over the number of years until you retire. Big mistake!

lauren
lauren

i’m more in agreement w/ emmy. these day and ages of who read this blog – who hasn’t cut things to the bare bones? cut back the cell phone, the cable, not using credit cards, not eating out – etc. we’ve done all that and more. and still my husband is unemployed. no one has given any real solid answers beyond “oh, don’t end up here to begin with” — not very helpful indeed. as steve mentioned it’s a full time job looking for a job. my husband spends hours every day reinventing his resume for every job he applies… Read more »

Adrian
Adrian

Hey Anonymous GRS Reader, First and foremost — this sort of situation isn’t as uncommon as we would like to think. People are commonly very discreet about their financial affairs, so a key point is to assure your family member that he is CERTAINLY not alone, nor does he have to face this dilemma entirely by himself. I have the echo the sentiments of comment #1 wherein your family member MUST cut to the bare minimum — for when things get truly tough in life, you have to get TOUGHER. Secondly, when it comes to not being able to provide… Read more »

Ms. Clear
Ms. Clear

The total amount of unemployment in this country, counting underemployment and discouraged workers, is up around 16%, so it’s not really possible for many to find 3-4 jobs. It’s often impossible to find one job.

The selling of assets, like a second car and possessions is definitely a way to earn extra money. Odd jobs, cleaning or babysitting could help as well.

Nancy L.
Nancy L.

Exactly, Emmy. So you have six months of savings in your emergency fund. So you cut back all unnecessary spending. Hopefully that carries you through, but from what I’ve seen, that tends to be when your car falls apart and the furnace dies (in a cold snap) and your kid falls and breaks his wrist. And then after all of that, there’s a potential good job that you have to travel multiple times to interview for, but then in the end they go with another candidate. In other words, when things are bad, they can be *really* bad. It’s easy… Read more »

Dandilyon
Dandilyon

I recently came to a similar point where I was going to be homeless in about a month and a half. Recently divorced, I have been job hunting like crazy but the fact that I have been a stay at home mom for the last 17 years has been working against me. I was about at the end of my rope when I had the idea to move into an rv park. Altogether I save $475 a month now, enabling me to support myself on much less job, and that’s including a camper payment (0% interest til May and my… Read more »

No Mortgage No Rent
No Mortgage No Rent

To flippantly suggest that all the guy needs to do is go out and get 3-4 jobs suggests that the commenter hass never faced financial straights. However, I agree: *stop spending. No cable, no netflix, none of that. There’s no shame in soup kitchens *Move to a cheaper place if at all possible. Sell the house or move to a smaller apartment. The boys can sleep in bunk beds if need be. *Get rid of as many cars as possible. *If he CAN get 3-4 jobs, then great. *If he needs to use credit cards to get interviews suits, go… Read more »

Linear Girl
Linear Girl

The most important part of JD’s advice is to act quickly when the job loss occurs. My step-sister went through this when her husband lost his job during the dot com bust. They had about six month’s of expenses in savings and so weren’t too worried and continued to live the same way they always did, assuming that’s what the emergency fund was for. The problem was that it took 18 months for him to find a new job. They didn’t lose the house, but the debt they took on eventually led to losing the marriage. In retrospect, they could… Read more »

Justin
Justin

While I feel like everyone’s advice has been good from a personal finance standpoint, you have to recognize a point when your personal finances could soon fail and you may need public assistance. Especially for someone who has four kids, this is exactly what these programs are made for. Proactively contact your social services (months before you think you’ll need help) and see what you could qualify for. They’ll tell you at what point of your emergency fund you can receive food stamps. (you don’t need to touch your retirement, 529, or HSA funds to qualify). With four kids you… Read more »

David/Yourfinances101
David/Yourfinances101

I would say first, take whatever job is out there that will pay you anything. I think a lot of times people are unwilling to take certain jobs. If faced with such a problem, I would wash dishes if I had to. Work two jobs if you can. Once again–desperate times–desperate measures. Cut, cut, cut. I think the first thing to go would be TV–I could easily live off of local channels if I had to. Next, do anything you can to cut utilities–run AC or heat less, use less water, etc etc. I owuld deplete my emergency fund. I… Read more »

Just Watching and Waiting
Just Watching and Waiting

My brother is in a similar situation. He lost his job last year but won’t take a job that is “beneath him”. No, I tell a lie, his WIFE won’t let him take a job that’s “beneath him”. He’s been offered opportunities out of state, but his WIFE won’t move. They are now relying on the food bank, which, his WIFE complains, gives out chunk lite tuna versus the solid white they’re used to. She used to be a corporate big shot, but she refuses to get even a part time job – even though their kids are tweens who… Read more »

Stunned
Stunned

Few people could have predicted the true magnitude of this crash. I know of a lot of people who have really cut down to bare-bones living just shy of moving into their 11 year old car. It does no good to tell someone how “stupid” and irresponsible they were. The situation is what it is…finger wagging doesn’t help at this stage of the game. Personally, if all my “safety nets” failed, credit counseling failed and my MARRIAGE or the health and well-being of my SPOUSE and CHILDREN was on the line I’d bite the bullet, go BANKRUPT and start over.… Read more »

Financial Samurai
Financial Samurai

It’s important to ask yourself why are you asking the question regarding your family member. If the reason is to truly help him/her out, then the answer is simple. Have an open conversation, write out all the liabilities and assets, and help that family member with a interest free loan up to your financial means.

It’s really that simple. If you want to help, you should help.

Best of luck!

Linear Girl
Linear Girl

@Just Watching – Maybe he blames his wife, but he makes the choice whether to work those jobs. She’s a handy scapegoat to excuse his behavior to his family, especially if his family already dislikes her. As for her “huge” retirement account “somewhere,” how on earth is that any of your business, if it even exists? If she’s as image-driven as you describe there is every chance it’s fictional. Your brother and his problems come with a wife you can’t respect, I get that. But when you decide whether to help him, decide based on who he is, right now,… Read more »

J.D.
J.D.

I only marked two “great comments” here, but I actually like the entire discussion. (I marked these two as great because they come from folks who are experiencing this.) This is a difficult issue, and it’s made more complicated by the emotional stuff that goes into it. I’m one of those who agrees that the standard financial advice — cut spending, work an extra job, etc. — is great as far as it goes, but that it can be ineffective in the face of a crisis. The standard advice is good advice, but what happens when you’ve cut as far… Read more »

Been there Done that
Been there Done that

I lived beyond my means back in the early 80s and went broke in 1985. Few rules if you want to survive: 1: If you think that some jobs are beneath you, then you deserve to be broke. 2: If you think that your house and car makes you a bigger or better man then others, you deserve to be broke. 3: If you refuse to give up the boat, country club, golf, trips, four-wheelers or any other extras, you deserve to be broke. 4: If you have bank notes on anything other then your house and maybe one car… Read more »

Frank Rizzo
Frank Rizzo

If bankruptcy is looking like it might be an option, retirement funds are protected in many states, so it may make sense to NOT use those (and maybe to contribute even more to them if you can).

Frank

april c
april c

The way I see it, if someone in your family is hurting financially you do everything that you can reasonably do to help them. This does not mean tapping your emergency savings to help them keep their house or car. It means letting them stay in your house for free (if you know they are not going to take advantage of you) or a for a stupidly low rent to make make up the difference in utilities and food. Also loaning your car so they can go to job interviews, saving coupons for them on items that they use, and… Read more »

Sam
Sam

Most experts advise against lending money to family, but over the years I received loans and gifts from my family and loaned and gifted money back to family. My mom had a business that went south and she kept investing money into the business until she was basically broke. I helped her out (and the money I gave to her was from 0% credit card checks – dumb dumb dumb) but she was my mom and she needed the help. I think now, that I know a lot more, I would require a commitment to change from the family member,… Read more »

jj
jj

I would advise in some situations, the SAHM spouse should explore part-time job options. Not easy, I know, but it’s better than having one spouse get 2 jobs to support the family. Plus, if the wife is able to get a job, having 2 people with work skills is a better buffer against future lay-offs.

I know it’s not easy but I saw my mom do it, taking very menial jobs until she worked her way up to management many many years later. It was hard but do-able since us kids were a little older.

Chickybeth
Chickybeth

My take on loaning money to people in these situations is that it never does any good. I have been the person receiving the loans and at the time, I thought it was a make-or-break situation and that my life would be ruined without the loan. Now, the person hangs the loan over my head so I will do what she wants. In retrospect, had I not taken the loan and just dealt with the problem on my own, I would be in a much better financial position than I am in today. What I really needed was support, a… Read more »

Shara
Shara

I acknowledge that sometimes bare bones budgets aren’t enough to keep you from getting in a deeper hole, but “bare bones” is something people describe differently. To some people bare bones is cancelling the movie channels and eating sirloin steaks instead of fillet. It’s amazing what you can survive if it really means something to you. I have watched a number of families get in over their heads. Usually it is a logical outcome of bad decisions, I know there is no going back once the bill collectors are at the door, but at the same time we need to… Read more »

cely
cely

I am very fortunate to not be in this situation, but I think about it all the time. I am building up my emergency fund even further for just this reason. My best friend and I have talked about worst-case scenarios. He owns a house, I own a condo. If things went horribly south for me, I could sell my condo (at a loss if needed) and move in with him. We’ve talked about options for him as well; luckily he has family here with room for him if needed. We’re very open with each other about what might happen,… Read more »

Linear Girl
Linear Girl

Shara – Great plan. I’ve got mental versions of plans, but it reminds me that I need to sit down with my guy to discuss his mental plans to make sure we’ve got similar trigger points for making those kinds of changes. We usually do, but it’s dumb of me to assume we’re on the same page. Congrats on getting through this and having the plan in place to do so.

brian@FinanceAnswers

I think there are two very important points JD made when faced with this situation: 1. Be brutally honest: Don’t run from the problem, instead take it head on. If you were the cause, take responsibility and ask yourself, “What can I learn from this?” If it were out of your control, then mentally reframe the situation, ask yourself these questions: Has anyone been in a similar situation and come out stronger? What can I learn from this? What opportunities are hiding in this circumstance? Try to consciously maintain an internal locus of control… this isn’t an easy thing to… Read more »

kim
kim

I know this doesn’t answer the question that was asked, but many people seem to be saying don’t help by lending to a family member. I think If you want to help out your family member then maybe instead of lending them money give them grocery or gas cards as gifts, or a family pass to the zoo so they can do something with their kids without having it be a stress on the family finances. Giving these things freely can show that you recognize that they are in a tough spot and are supporting them, without creating a tense… Read more »

ebyt
ebyt

It isn’t clear to me from the post whether or not the reader’s relative actually has a job or not. If he doesn’t have a job, then he needs to do whatever he can to find one. Make contacts. ASK people. I got my current job as well as my part-time job just by asking contacts if they had any positions open for me. My university degree of course helped show them I am qualified for my jobs, but without asking for the jobs they would not have just fallen into my lap. Be resourceful. To avoid sinking deeper and… Read more »

amanda
amanda

I have a couple of friends who really struggle with the want-need continuum. Two, exactly. Both are struggling with relatively modest amounts of credit card debt ($5-6K, which for a working adult with no kids ought to be pretty easy to shake) and both know their way around Ikea in a way that I just don’t. They “need” things like organizers for magazine archives; coordinating kitchen hook thingies; more organizers. That is what I notice the most. There are parts of my home that I know would benefit from more thoughtful shelving (the CDs, mostly. I kind of do need… Read more »

mimi
mimi

I don’t quite get panicked emails/questions like the one in this blog posting. The answer is really quite simple and obvious — slash spending and lifestyle and get as many extra, temporary jobs as it takes to stay afloat. There’s no fancy answer or magic bullet. Go get as many part-time jobs as it takes while you are looking for the career-type position. Retail, babysitting, mowing lawns, pizza delivery, whatever…these jobs or others like them are always available if you’re a competent applicant in any economy. In most cases, it’s possible to bring in enough cash to avoid credit card… Read more »

frugalscholar
frugalscholar

My sister-in-law, the child of immigrants, has a banking job. But she has said many times that she would “clean toilets” if she had to. I think she’s quite serious. And, if she did all she could, I would be happy to take her and her family in.

Financial Samurai
Financial Samurai

If you are a family member consider your loan as a gift and write it off mentally. Sure, your family member in need may say they will pay it off, but mentally expect NOTHING back. Give it to them straight.

Suzanne
Suzanne

To Dan #7, there are a couple of reasons not to use retirement savings. First, it’s very expensive to use. You pay a 10% penalty plus taxes. If you’re in a 28% tax bracket, you’ll pay nearly 40%. So if you take out $100,000 out of your account you can only spend $62,000 of it. Second, as someone already mentioned, if this person is in such dire straits, using retirement savings will likely only be delaying the inevitable bankruptcy. In bankrupty, retirement savings (in an IRA or 401k) cannot be touched. So they may well be spending their future unnecessarily.

mick
mick

Re recommending selling the car… Sometimes the only thing a person has to sell is a car; may not be able to sell it due to loan or lease requirements and/or acquire a cheaper car or can only acquire a car in questionable running condition compared to the currently held car. If you live in a local with no public transportation (there are more places without transport than with, including USA cities), what sense does it make to sell your car? No car = no work. Carpooling is not necessarily an option for those people who transferred to keep a… Read more »

Financial Samurai
Financial Samurai

Dear Anon GRS reader who posted this question. I read your question again, and unless I have poor reading comprehension, why do you end asking how YOU can avoid going deep into debt, instead of asking JD and the readers how you should HELP your family member?

It’s like watching some reporter, reporting on poverty and starvation with a sick mother and child in the background. We’re not sure whether the report, cameraman and crew proceed to help out once the camera stops rolling.

Help your family member!

Dan
Dan

Thanks Suzzane and Frank, that makes more sense now. Yea if you’re going to go into bankruptcy either way, it doesn’t make sense. I guess taking out Roth IRA money would still be ok though… Here is the situation I was thinking about: My uncle who is approaching retirement age (56) and has saved up a lot of retirement money in IRAs and 401Ks (over 1 million). However he’s been out of a job for awhile and is struggling with cash flow. It hasn’t come to this yet – but i have suggested to him if worse comes to worse… Read more »

Little House
Little House

In the early 2000’s, my husband and I ran into a similiar situation. We were maxed out on our credit cards, I lost my job, my husband’s business wasn’t earning any income. We were in big trouble. We even got evicted in 2001, luckily, that came off my credit report this year! We learned the hard way, which, sometimes, is the best way to learn. We never mentioned anything to our family members. I worked 2 jobs and we cut our costs. We royally screwed up our credit, but we are now in the process of fixing it. Luckily, we… Read more »

Brenda
Brenda

I’d like to throw in some advice about getting a job ‘that’s beneath you’, since I see a lot of folks that assume it’s easy to get a retail job. Here’s the catch: If you’re a successful business who lost his/her job and are taking on a retail job in the interim to make ends meet to avoid going further in debt, you have to be VERY careful how you word your application and how you speak in the interview. If the retail employer knows your situation, it is unlikely you will be hired at all, because the manager knows… Read more »

malingerer
malingerer

“Avoid touching retirement savings…” ya, but if the world has fallen apart and the money is there you may have no choice. As it truly is an emergency fund; whether it’s for now or later..

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