Has This Happened to You?

A typical Scenario of Financial Hardship

Todd is living a financially comfortable lifestyle, with a household gross income $85,000 per year. Todd is married and has two children. Both are attending middle school and they have made plans for a cruise vacation, which is coming next month. The travel agent has been fully paid in advance for the cruise. 

In the interim, Todd’s mother-in-law became ill and is hospitalized. The prognoses is that she will need to live in a nursing home, because she will need 24 hour care; however, they decide to bring her to home, as that would be the better option. After all, he has an extra bedroom.

Arrangements are made and his mother-in-law moves in. A 24 caretaker is hired to care for her and although this is starting to become a financial burden on the family budget, Todd decided not to cancel the cruise. His thoughts were that as long as he and his wife are working, there will be no need for concern.

While on the cruise, their excursions that have totaled over $2,000 for the four of them. The charges were put on his credit card and Todd felt that shouldn’t be a problem.

Upon their return, they find out that his mother-in-law requires special medication that Medicare won’t pay for and it costs $1100 per month.

All these expenses are adding up. A larger portion of the $85,000 is now going to these new financial obligations, but Todd is managing it fairly well, although he found that he is being late on some of his credit cards, as well as his mortgage. Despite this being a concern, Todd does not take it too seriously, because he is making the payments before the 30 day deadline, so his credit is still good.

Nine months later, his wife was laid off from work. $35,000 per year income is no more.

In order to maintain his good credit and not be 30 days late on their mortgage, Todd realizes that he should withdraw some money from his IRA. Six months have passed and he has been taking money out from his IRA on a continuous basis, totaling over $25,000.

Tax time has arrived and he and his wife are told that they owe the IRS $8,500 in early withdrawal penalties. 

The credit card companies are calling him, but he ignores their calls.

It is now apparent that they cannot keep up with their expenses and have no choice but to seek the advice of a bankruptcy attorney.

How can Todd have avoided this financial crises?

1. Todd anticipated additional expenses, but did nothing about it. That was his first mistake. Todd should have planned ahead by budgeting what the family can and cannot afford. Thinking that he can handle it, when he actually was not sure is only fooling himself. He should have taken these upcoming expenses much more seriously and not pretend that everything was going to be OK.

3. If the numbers still didn’t work after his budgeting calculations, then he should have taken the next step. In our scenario, Todd should have cancelled the cruise. For some cruise lines, you can get a full or partial refund or a credit to take the cruise at a later date. In addition, Todd did not anticipate the additional excursions costs and other additional costs associated with the cruise.

4. Todd could have contacted his mortgage company and asked for a loan modification. There are programs that could help him; such as HAMP and HARP. Also, if he realized his credit score was going downhill, he could have tried to refinance his mortgage at a lower rate or try for an FHA loan.

5. He could have contacted the credit card companies and tell them his situation. Ignoring the credit card companies does not mean they will go away and possible legal action can occur if not handled appropriately. Many banks have payment plans for people who have come across unexpected financial distress. 
6. Many people get penalized by withdrawing money from their IRA before the age of 59 1/2. Unless there is extreme hardship (e.g. you may lose your house), you should not consider this option, but Todd did and had to deal with an $8,000 additional financial burden from the IRS.

6. Going to debt relief services is another option that Todd did not consider.

Bottom line: Always plan ahead for the unexpected. If you anticipate future expenses, make arrangements in advance to budget and compensate for those expenses. If you see that you can’t afford it, do not look for ways to continue to pay for everything and ‘expect’ it will be alright. There are many resources where you can go for help and contacting them is your first step to financial stress relief.