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Winter 2003 Bulletin

PARENTS TO THE RESCUE

What with student loans and easy consumer credit, these days many young adults suddenly find themselves with serious debt problems. Sometimes the debts just grow until they reach critical mass; sometimes a crisis is triggered by redundancy, reduced earnings or a relationship breakdown. Parents may want to help their children through a difficult time, but they should not simply offer to pay the most pressing creditors. By adopting a more businesslike approach, they can maximise the benefit obtained from the contribution they are willing to make.

The first step must be to establish the facts – all the facts. There is no point in repaying debts of £10,000 if other creditors are owed £20,000 and one of them will petition for bankruptcy if he is not paid. Very often, the smallest creditors are the least patient and most dangerous: after all, the mortgagee has security and official Student Loans are repaid through the tax system, but the only hope a finance or credit card company may have of collecting its money is to take legal action.

Once the facts are established, it may be that the parents are able and willing to repay enough of their son’s or daughter’s short-term, high-interest consumer debt to resolve the immediate crisis and leave him or her able to manage long-term liabilities, such as mortgage and student loan repayments. On the other hand, they may have £10,000 available and £30,000 of high-interest debt to repay.

The general rule of law, in England and Wales, is that an agreement to accept less than the full amount owing is not legally binding. (The position in Scotland is different, but someone living in Scotland may still find that his credit card agreement is governed by English law.) However, there are a number of exceptions to this general rule, one of which is that if a third party offers a reduced sum ‘in full and final settlement’, and the creditor accepts, then the agreement is legally binding. This principle was, in fact, established by a series of nineteenth- and early twentieth-century Court cases concerning fathers who settled their sons’ debts to moneylenders.

The worse the son’s or daughter’s financial problems, the stronger the parents’ bargaining position as they can say, politely of course, ‘take what I am offering or be satisfied with nothing’. When house prices slumped in the 1990s, it was not unusual for parents to settle their children’s negative equity for less than ten per cent of the total amount outstanding. Creditors are pragmatic people and know that the alternative may be to write off the debt, or sell it for a few pence in the pound to a collection agency.

Finally, be aware that many debt advice services charge high fees or are really in the business of selling ‘consolidation loans’ – a new loan to repay existing debts. They may even recommend remortgaging the parents’ home to repay the son’s or daughter’s debts, which is unlikely to be a good idea.

If someone in your family has serious debt problems – however they arose – please contact us for a confidential discussion. There is an old saying, that a debtor is like a donkey in a quagmire, but it should be possible to find a rope to pull him out!