No. of Recommendations: 5

You wrote, She is in her early 70s, Her current income is about $20k.
M lives in a rental, but owns a house that was purchased a couple years before the Big Drop (and was purchased with most of her *retirement savings*)
House is currently worth about $20k less than owed.
That house is rented out - but there is a delta of about $250/month that M is paying.
M has about $20k of CC debt (at 0-4%) that she is paying down $400 ish/month.
M has spotless credit - credit score over 800, because she has apparently always managed to be ON TIME with her payments. She is averse to filing BK, but does not think she can continue to *keep it up*

Her rental apartment + all expenses comes to about $800/month - very manageable on her current income, which is NOT likely to increase.

This came about because friend was asking M if she needed any financial assistance and should she and her siblings pool together to augment M's income ...
Friend & siblings are NOT keen on paying off M's CC debt, but feel like $250/month to finish the house mortgage (15 more years) is acceptable- and a waste to just *walk away* from it.

I think vkg covers most of the issues. However, I have to question some of the details here.

M only has $800/month in expenses, $20K/yr in income and she's not keeping up? Those numbers don't make sense - in more ways than one.

First, the expense number is only $9,600/yr. I imagine M doesn't owe any taxes on her income, so all of that is being kept. (Unless some of the income is from a job, in which case there will be FICA due.) Therefore M has about $1,667/month in income each month.

Second, in what area of the country can you live on only $800/month? Rent and utilities - even in most rural areas of the country - would eat up most of that $800 budget. That would barely leave room for a subsistence rice-and-beans diet.

I suspect M is not evaluating her expenses and income correctly. I also wonder if she's event bothering to file income tax returns. The rental income is taxable and must be reported on a Schedule E. Interest, taxes, maintenance and depreciation are also expenses that she should be reporting on Schedule E. Unfortunately if she's loosing money on the house as a rental and given her low income, she won't get any real tax advantage from the losses she's incurring. Also, M is probably under estimating how much value is actually being lost as the property ages and tenants wear things out (the real reason behind depreciation).

M should be considering all of her expenses and all of her income when evaluating bankruptcy as an option. Simply saying she has $800/m in expenses is probably disingenuous ... as is saying she only has $20K/yr in income.

Now if she ditched the house and the credit cards and could actually live on $800/month, it might be worth considering BK. However, she claims that she's only loosing $250/month on the rental. If her living expenses were only $800/month and she's only spending $250/month on the rental, her total expenses less the credit card payments are only $1,050/month. Minimum payments on $20,000 in credit card debt is about $400/month, plus or minus depending on the issuer.

Once again there is more evidence M is being disingenuous because based on that approach to analyzing her reported income and expenses, she should still have a surplus of over $600/month to go toward the credit card debt. And $200/month to snowball toward repaying the credit cards.

So what do I think you and your friend should consider before approaching M again? I think you should ask for the truth. Failing that, I would suggest your friend needs to encourage her mother to speak to a BK attorney and your friend should otherwise stay out of her mother's finances.

Also, I wouldn't advise anyone give their mother $250/month if they're clearly blowing the funds on a property that is under water and will return either them or their mother some value in the future. Your friend's mother's vanity probably isn't worth $3,000/year. Besides, lending money tends to be a good way to upset relationships between friends and family.

Of course if your friend just has more money than s/he knows what to do with - they could just buy the house from their mother. That scenario removes a financial burden without seriously injuring M's pride - at least if your friend handles it well.

- Joel
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