Use equity for friend with credit-card debt? Be careful

By STEVE BUCCI
Monday, March 12, 2007

Dear Debt Adviser,

My friend has several credit-card accounts totaling more than $35,000 in debt. My friend has a steady, well-paying job. But the debt-to-income ratio is too high for the banks, so a personal loan could not be approved and tapping into home equity is out of the question. I have considered using my home-equity line of credit to help, but am very concerned about putting myself into that situation. It's a close friend, but someone whom I have known only for a couple of years. I'm also concerned about how this might appear to family and other friends. I do trust my friend and I want very much to help. I am looking for advice that will really help my friend and still keep me in a financially good position.

_ Dan

Dear Dan,

Your intuition was right on when you became concerned about risking your home and financial well-being to help a close friend.

Trustworthy as your friend may be, financial help from you is most likely not in the best interest of either one of you. First, I'd ask your friend why he or she is carrying that much of a balance. There may be more of a problem here than just a high debt-to-income ratio. Next, I think a better idea is to encourage your friend to understand and deal with the root cause of the dilemma. Consider recommending that he or she seek help from a reputable credit counselor to get nonjudgmental insight. The counselor will also help your friend determine the best options to help retire the debt.

Just in case you decide, in a moment of weakness, to help your friend, let's explore the financial realities for those who combine finances as friends/roommates, family members, same-sex couples or unmarried heterosexual couples.

You didn't say whether you and your friend are a couple, but the federal government recognizes only married heterosexual couples as legally joined financially. In the eyes of the feds and many states, you are strangers with anyone else whom you may be tied to financially. Therefore, any financial arrangements would be considered arms-length transactions that need to be spelled out in written documents to be valid.

My bottom-line advice: I do not recommend paying off this debt with your home-equity line of credit. Not only does that transfer legal responsibility to you, but you could lose your home if for some reason your ability to repay the debt became compromised. If you decide to loan your friend the money, I suggest that you draw up a legal contract to ensure that the terms and conditions of the loan are clear and that you have legal recourse should your friend not repay the loan.

Several other legal documents might come in handy for those who are mingling finances. They are listed below.

_ Wills and/or revocable living trusts and pour-over wills: If you do not have a will or revocable trust, your assets may pass to your family, rather than the person to whom you wish them to pass.

_ Durable power of attorney for finances: You name a person who will make financial decisions if you are incapacitated.

_ Domestic-partner agreement: Similar to a prenuptial agreement, this document spells out who gets what in the event one or both parties want out of the living and/or property or financial arrangement.

_ Beneficiaries: Review the beneficiary designations on your retirement accounts, stock options, life insurance and other assets.

Several of the above documents give a person(s) a tremendous amount of power over your financial well-being and should be considered very carefully before signing.

Don't let being a good friend become a bad financial decision.

Good luck!

(Steve Bucci is president of Money Management International Financial Education Foundation. Visit www.moneymanagement.org for additional debt advice. The Debt Adviser is a weekly feature of bankrate.com. For more stories, visit scrippsnews.com)