Should I forgive the $28,000 my bankrupt parents owe me?

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Dear Penny,

I loaned my parents about $21,000 about eight months ago, and another $11,000 about four months ago. The $21,000 was supposed to be “long term” to help my parents consolidate their debts (about two years in my mind), and the $11,000 was supposed to be for one month. They repaid $4,000, but nothing since the second loan.

My parents had just finalized bankruptcy less than a year before the loans. I knew they could use the first loan, and the second helped my dad put down a deposit on his new sports car. Our last discussion was about my parents tapping into their retirement savings in 2022 to pay me back the remaining $28,000. I know the income has been inconsistent for them. My father is 73 and close to full retirement and my mother is 57 and works part-time.

Now here’s the twist: I don’t need a refund. I have done very well financially, especially during the pandemic, working my two jobs as an adjunct professor and starting my own very profitable business.

So I was wondering if there was a way to give a financial “thank you”! to my parents for being so great (they really are) while holding them responsible for the loan in some way. In addition to everything intangible, they also helped me with a loan to buy my second house, which was paid off as agreed. But I don’t want it to be easier for them to ask for more money, especially since I was the only one of the three kids they even talked to about borrowing money.

They intend to repay the loans, although they appreciate the flexibility I have. My mother is particularly adamant after the second loan. They have no idea that I’m even considering changing what we’ve agreed to.

If it’s important, if the loan had to be repaid, I would probably put it in my own retirement account. And other than student loans, I have no debt, personal or business.

-Financially flexible

Robin Hartil [ The Penny Hoarder ]

Dear Flexible,

You are already thanking your parents financially – whether you continue to be flexible about the repayment schedule or cancel that debt altogether. Since your parents are approaching retirement, this is a good opportunity to discuss their financial situation with them. From there, you can decide how much (if any) you want them to refund you.

Personally, I’d be more forgiving of the $21,000 loan you took out to help your parents get back on their feet than the $11,000 they borrowed for your dad’s sports car. I’d also be nervous about their spending habits knowing your dad bought a sports car so soon after filing for bankruptcy.

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One option would be to have your parents sign a promissory note with very generous terms. Since you don’t need the money, you can ask them to agree to pay you a small amount — say $50 or $100 a month — and not charge them any interest. I guess you’re not going to sue your parents if they don’t make the payments.

But putting the agreement in writing makes it a bit more formal, and it helps make it clear that you’re not a human ATM. By allowing them to make small payments, they can avoid the tax consequences of withdrawing $28,000 of retirement money in a lump sum.

If you’d rather make it a one-time gift, be sure to tell your parents what you told me: you really don’t need the money. This is a small expression of gratitude.

As for future requests, I think you need to be honest about your willingness to help. If you are not willing to lend your parents money in the future, tell them now, that is, before they come to ask you for another loan. That doesn’t mean they won’t ask for it again, of course. But at least you manage expectations from the start.

If you and your parents agree on a repayment schedule, consider the likelihood that they will need money in the future. Many adult children end up providing financial support for their parents in their later years. If you think you’ll eventually have to, consider putting the money they refund in a separate bank account you’ve set aside for this purpose. You don’t have to tell your parents you’re doing it. But at least you’ll avoid the taxes and early withdrawal penalties you might face if you put the money in a retirement account, only to withdraw it again.

Ultimately, it’s a good problem to have. Your parents are lucky to have such a generous child.

You’ve followed the golden rule of lending money to family, which is never to do it unless you can afford to give it as a gift. However you do it, be sure to tell them that your flexibility is your way of saying, “Thank you for being so awesome.”

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Robin Hartill is a Certified Financial Planner and Senior Writer at The Penny Hoarder. Send your tricky money questions to [email protected].

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