Prepared for the “Doom Loop”
It’s a phrase this writer didn’t know about. But there it was in a Forbes Magazine article on October 14. In short, a “doom loop” is when a house of financial cards starts to tumble. A couple creates a tangle of assets and debt; typically funded by two incomes. Suddenly, one of the incomes disappears. The typical causes are job loss, divorce or drug addiction. It can also happen when there is unexpected medical debt or variable rate debt, whether mortgage or personal. The Suze Ormans and Ed Slotts of the world tell us we should all have 3 months worth of expense money sitting in the bank. But Forbes says we don’t and, by the way, divorce and drug addiction just don’t disappear after 90 days.
We tend to think of homelessness as something that occurs to people who are utterly without resources. But, if you have been paying attention, you may have read or heard about people who had substantial jobs/careers at one point, yet who fall through the cracks because they have no savings.
Today, we often see parents come to the rescue. Either good savings habits or dumb luck have left them with resources that are not needed for immediate consumption. So, they intervene with funding to make certain the grandkids don’t lose their home or get kicked out of private school. As divorce lawyers this pops on our radar with some frequency. We are in the middle of a divorce and that is already a taxing unbudgeted expense. Then one spouse loses a job or falls prey to oxycontin. This can create financial free-fall unless a parent intervenes.
What we don’t see and ethically cannot discuss (except in blogs) is the fact that the rescuing parents can also become victims of their child’s doom loop crisis. In the typical case, as lawyers, we represent your kids in the divorce. The crisis hits and the parents come to the rescue, covering late mortgage and car payments. Time moves on and the payments start to mount. There’s the orthodontist and the piano lessons and something for Christmas while mom is in rehab or dad searches for a job. The 90 day lifeline that was supposed to be in savings is now a 180 day or 365 day lifeline and the parents are pulling money out of retirement accounts for needs they never budgeted to have; their child’s needs. The parents doing this funding will sometimes be on phone calls lawyers have with their clients and they will say things like: “This is costing a lot; when will it end?” As lawyers (a) we don’t know and (b) we are representing your kids and you are talking about your financial future and not our clients.
The lesson here is that when the pin of financial stability gets pulled and the doom loop begins, parents do come to the rescue. It’s what families do for each other. But parents need to set limits to their contributions and insist on a plan that allows their escape from their children’s financial responsibilities. We have seen parents jeopardize their own financial security in the name of rescuing a child with overwhelming debt. They have funded business interests for their kids or paid off mortgages with retirement money they need for themselves. The trouble is that if those parents are fully retired, they have a disadvantage their children do not. They have little to no ability to replace the money they have plowed into supporting their son/daughter/grandchild.
If you are a parent summoned to your child’s financially burning household, approach carefully. Of course, you can cover next month’s mortgage and car payment. But can you do that for a year while hoping that the downward spiral abates with a new job? Unfortunately, your kids (the ones in trouble) see you in a mortgage free house and money in the 401K. That’s true but do you really want to sacrifice your own financial security so the piano lessons or private school can continue? There needs to be an exit strategy where the kids sell their home or trade in their cars and resume a humble lifestyle. There may even need to be a bankruptcy. As the Forbes article aptly notes, there are many formerly well-off couples who may face these hard choices.
Parents don’t like these choices. But they are very real. And you are doing your kids no service and putting your one well-being in jeopardy if you start supporting a second household without an exit plan.
We should also note that some parents are already in this mess before the realize it. Your son and daughter in law want to trade up to the big house or get a place at the shore “for the grandkids.” They have solid income but don’t quite qualify for the financing. The parents wade in to guarantee the mortgage or become unspecified “partners” in the new residence. Then there is a job loss or a divorce or another catastrophic event. Now you are in the middle of it because the lender for “bighouse” is banging on your door for the mortgage payment. Or, your son in law in rehab refuses to agree to sell “bighouse” because he knows he will go back to making $200,000 a year as soon as he gets out of rehab and off probation. What you needed when you signed these financial documents was an agreement that effectively gave you control of the “bighouse” as soon as there was any default in the mortgage so it could be sold and the debt retired.
The borrowers or co-owners are your children and their spouses. You wanted the best for them when you came to help. But, again, in your days of retirement, you can’t afford to see your ship go down while trying to rescue theirs. It’s just not smart.
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