The Lee County School District offers a wonderful course for parents called “Love and Logic”. The basic premise of the course is to not shield your child from her mistakes, and allow her to bear the consequences of her actions and decisions. The idea is that if you allow the child to bear her own consequences early in life, she will be better prepared to avoid bigger problems later.

In other words, for example, by not driving to school to drop off homework that your daughter left on the kitchen table, you allow her to bear the burden of a failed grade for the homework. In doing so, she has learned a valuable life lesson that mom and dad aren’t always going to be there to bail her out. The course teaches you to be loving and sympathetic, but not to always step in the role as protector.

I’ll tell you that in practice it’s very hard to say, “I’m sorry, honey, that you left your homework on the kitchen table. It’s really a shame that you failed that assignment.”

The parent certainly can expect screams and shouts about how we could have helped but didn’t. And that’s tough. But gutting it out typically leads to a more responsible child.

So what do you do when the consequence isn’t something as trivial as a missed homework assignment, but rather your adult child’s financial health?

I’ve received several phone calls from clients in recent times, all with pretty much the same problem. It goes something like this: Their adult son or daughter is in financial trouble. The children are upside down with their home and mortgage payments. They just lost their job. It’s hard to put food on the table. Righting the ship will likely require cash gifts totaling tens of thousands of dollars.

The client (the parent) is concerned about having enough money for their own retirement needs after the stock market crash, but wants to help the kids who are pleading financial distress. What should a parent do in these circumstances?

While every situation is different and should be handled in its own unique way, there are some common threads of advice that may be taken into account:

Keep your own house in order. Don’t let your child’s problems become your own. Do not agree to personally guarantee mortgages, debts or credit cards. We all know how life guards are trained to avoid letting a drowning victim cause the lifeguard to drown as well. Determine what you must do to protect your own financial health before agreeing to bail out your children.

Bankruptcy is a tool that is sometimes appropriate.   If your child has invested in “Spec Houses” and has been unable to make the mortgage payments, chances are he has already adversely affected his credit rating. Sometimes the best idea is to negotiate a deed in lieu of foreclosure with the lender, although it is my understanding that most lenders are not agreeing to such terms. In such instances, a visit with a competent bankruptcy attorney may serve the child well. Bankruptcy is a legal tool to give folks a chance to get out from under a situation from which they would otherwise never recover. Recent changes to the bankruptcy laws have made it harder to “start over”, but it doesn’t hurt to get competent advice from a bankruptcy professional before embarking on your own strategies.

Allowing the child to go under. Using the “Love and Logic” model, allowing the child to go under financially won’t always be a bad result. You are training the child to bear the consequences of his or her decisions. Better to lose $40,000 now then squander a $1 million inheritance that you may be leaving them someday. Since so many people will have bad credit ratings due to mistakes made over the past several years, one has to believe that the banks will be somewhat forgiving in the future or else they may find themselves without any loan customers.

Protecting against health emergencies. My wife’s grandmother (who is 94!) likes to say, “so long as you’re healthy, you have EVERYTHING!”  When young families find themselves in financial distress, health insurance premiums are often one of the first budget items to get cut. It’s not a good thing for your children and grandchildren to be without adequate health insurance. If you really feel that you ought to do something for your children and have the financial means to do so, consider helping them with the cost of health insurance and deductibles. So long as you pay the health insurance and medical providers directly, the amounts you pay are not considered towards the $12,000 annual tax free gift tax exclusion.

Pay for term life insurance. Another “essential” might be term life insurance on your child’s life. If a tragedy occurred life insurance might be the only financial lifeline his family could rely upon.

It’s a tough time out there for everyone. I hope this helps if you find yourself being asked to help a child in financial distress.

©2008 Craig R. Hersch .Learn more at www.sbshlaw.com