Don’t loan money to pay relative’s debt

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Dear Debt Adviser,
My sister-in-law has asked us to borrow $5,000 to pay her credit card bill. She told us that the credit card company won’t accept monthly payments of $100 and are going to foreclose on her house if she doesn’t pay the full amount. This doesn’t sound right to me. Credit card companies are usually willing to make arrangement for payment. Can credit card companies foreclose on your home?
— Kathy

Dear Kathy,
The simple answer to your question is: no. In general, a credit card company cannot foreclose on a home. If the credit card company is truly threatening your sister-in-law with foreclosure of her home, then she should let them know that threatening an action that they are not seriously going to pursue is not allowed and is a violation of the Fair Debt Collection Practices Act.

The credit card company may well be asking for a payment larger than $100 a month. At some point in a delinquent account’s life the entire balance of the card becomes due and payable. This includes all the late fees, over-limit fees, interest charges, legal fees and any other fees that may apply. Many people are shocked to find that they actually have to pay the entire balance if they default and think that the credit card companies will just wait forever for their money. Some may find your in-law’s naiveté charming, lenders don’t.

Before we get to the crux of the matter — should you loan the sister-in-law the money and what the credit card company can do to collect — I suggest you precondition anything with having her first get to a good credit counselor for an analysis of her situation and a review of all her options. She can find help at the Association of Independent Consumer Credit Counseling Agencies, (866) 703-8787, or the National Foundation for Credit Counseling, (800) 388-2227. I will be very surprised if they recommend she take a loan from a family member, assuming she is gainfully employed and really only owes $5,000. My experience is that there is a lot more going on here than you know … and you don’t want to know it!

As to what the credit card company can do to her, here’s the usual process. For the first 180 days the account will be in what I’ll call normal collections. Letters, phone calls and the like are typical. After 180 days the account charges off. She still owes the money, but the debt is considered a bad debt for accounting purposes. Her credit report gets scorched and the collection activity may move to an outside firm or an attorney.

Eventually she may get a summons to court and the court will be asked to issue a judgment in favor of the lender. If it goes further, then we get to wage garnishments, liens on property and the like. All the time the fees are adding up and the bill is getting bigger and her credit score is getting smaller. A judgment lien, rather than foreclosure, may be what the credit company is threatening when speaking with your sister-in-law.

Back to the request for a loan. This is a really bad idea on so many levels that I generally suggest that if you feel you must do something and you can afford it, you should just make her a one-time-only gift of the money. A loan between family members strains the relationship greatly, ruins holiday get-togethers, sets you up to be the unsympathetic bad guy if she doesn’t pay it back (after all you are lucky/rich/more fortunate/better looking/mom’s favorite, so why are you asking for money from this poor lady), and the list goes on and on.

I think a referral to a credit counselor along with some moral support and understanding will go a lot further to help matters than throwing some money away.

Good luck!

The Debt Adviser, Steve Bucci, is the president of Money Management International Financial Education Foundation and the author of “Credit Repair Kit for Dummies.” Visit MMI for additional debt advice or to ask a question of the Debt Adviser go to the “Ask the Experts” page and select “debt” as the topic.