I have been married for 12 years and have just been told by my husband that he has $68,000 in credit card debt. We have separate charge cards, and I have always had my charges under $10,000. He wants me to sign a contract for a 30-year loan to pay off his credit card debt only.
The loan would include rolling in our first and second mortgage as well as our car and truck. I told him, 'No, you should try to contact the credit card companies and deal with them directly.' Does anyone have any advice for me? I am 62, and my husband is 59.
With all the red flags this message contained, I just couldn't ignore it. So I'm going to offer my advice -- for what it's worth -- along with the insight of a couple of personal finance advisers. And in case anyone is curious, before deciding to publish my response, I e-mailed the commenter to let her know I'd be talking to some experts and turning her question into a story.
I don't know the income level of our 62-year-old reader or her 59-year-old husband, which puts me at a disadvantage, but I figure this situation is probably common enough that I don't need to know all the details in order to offer advice that will help.
My gut reaction -- and my deeper, more sustained reaction -- to this loan idea is -- don't.
It would be one thing if this was a 30-year loan that didn't include the mortgage, the car and the truck, but it does, and from my vantage point, that's just too risky. If they take this loan without risking the house, car and truck, that might be another story. Then maybe it's worth trying. Our reader will have to decide that.
The financial institution -- and I hope it's a reputable one -- is taking little risk here. If our reader doesn't pay off the loan, the bank gets it all. If they do manage to pay it off, they're raking in a ton of money over the course of 30 years. I realize the thinking is that if our reader signs the contract, she and her husband may get their money situation under control, but what if they don't? Are they willing to lose everything?
To get an expert's opinion, I spoke on the phone with Kevin Kautzmann, a certified financial planner with EBNY Financial, LLC, in New York City. "I see a lot of people do this type of thing," Kautzmann told me. "Baby boomers who really didn't do enough to save, and I constantly see 65-year-olds with another 30-year mortgage that they've just refinanced, and that's not a good position to be in. You don't want to be 90 and still paying off your house."
So what exactly should our 62-year-old WalletPop reader do? Kautzmann said that, based on the limited information we have, he doesn't think this loan is a good idea. First, he's guessing the reader and her husband will end up paying three times what their mortgage is worth by the time they're done paying off this loan. But even if they can stomach that, his concern is the same as mine: "They're taking a risk that they could actually have their house taken away."
Kautzmann would like to see our reader and her husband "tighten their belts" and get a second "part-time job or work at Home Depot during the weekends to make those extra payments and bring down their debt."
Still, when I pointed out that $68,000 in credit card debt is an awful lot and that I didn't think a couple of part-time jobs over the weekend would necessarily cut it, he agreed that it very well may not. Despite that, he still doesn't think this loan is a good move.
Next, I reached out to Johana Gomera, the lending manager at Affinity Federal Credit Union, in Basking Ridge, New Jersey. After hearing this couple's situation, she said that, in general, "combining all the debt under a mortgage agreement is not a bad alternative because you do save tons of interest and may be able to write off the interest you pay throughout the years."
That said, she added, "Please consult with your tax adviser." She continued, "The downfall of consolidating all debts under your mortgage is if you wanted to sell the home or refinance in the near future, and the equity of the home has fallen under your outstanding loan amount, it will be very difficult to sell or refinance due to the loan-to-value ratio. Another option would be to speak to the creditors and ask for a settlement. This means you negotiate the balance and pay it off in full within a certain time frame, usually 30 days. However, should you choose this route, be aware that it can impact your credit history."
Kautzmann and Gomera both offered good insights to mull over, but this still doesn't really tell our reader what she should do.
So let's get more specific. Here, based on the limited knowledge that I have of your situation, is what I would do if I were in your shoes:
- I wouldn't sign the loan.
- But if I felt like I had to sign and believed that this Geoff Williams that is writing me doesn't know what he's talking about, I would first find a neutral third party like a tax adviser or a financial planner and ask his or her advice. I know that might cost some money, which is probably something you don't have a lot of right now, but it's better to spend a few hundred dollars for some professional advice than make a mistake that will cost you untold amounts of money.
- If there is any kind of contract involved, it should be one that just your husband signs, promising to keep you in the loop on his financial situation from now on. Obviously, he should have brought up this $68,000 in credit card debt some time ago, and I hope you're talking about all of this in a constructive way. I know counseling probably isn't realistic -- that costs money you don't have -- but if you're religious, there may be a priest, a rabbi or some authority figure you can talk to. If nothing else, I hope you're both talking things out with someone, even if just a circle of close friends.
And I don't know if this adds or subtracts to my credibility here, but I know plenty about having too much debt. It's been well documented on WalletPop that I declared bankruptcy several years ago after about two decades of mismanaging credit card debt. On a few occasions, I was offered the "opportunity" to pay off my credit cards by getting my mortgage involved. I thought about it, considered it, and mulled it over seriously because it seemed like a such good way to finally get my debts under control. But each time, I ended up deciding against it. And I'm now convinced that not signing those documents is the reason my wife, kids and I still have our house today.
As for your credit history being impacted if you manage to negotiate and settle these debts, keep in mind that it already has been impacted. Unless you're raking in a million dollars a year -- in which case $68,000 in debt isn't going to mean much to you -- I'm guessing your credit score is pretty anemic. So if you have to settle and can settle, do that--and don't worry about your credit score.
I mean no disrespect to Johana Gomera when I say that. She's right. If you manage to settle, your credit score will be negatively impacted, and you need to know that. If you declare bankruptcy, your credit score will be brutalized, and the bankruptcy will stay on your credit history for the next 10 years. But you're thinking of making a decision that will ensure you're not only still deep in debt for the next 30 years but will keep some of your most valuable assets at risk.
I think that people worry far too much about what might happen to their credit score instead of worrying about themselves, and in an effort to protect their almighty credit score, wind up making devastating mistakes. The kind of mistakes that lead to losing your house. And your car. And your truck.
Geoff Williams is a frequent contributor to WalletPop. He is also the co-author of the new book Living Well with Bad Credit (HCI Books).