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Should you float Mom and Dad a loan?

If you can do it without ruining your own finances, sure. But writing a check for Mom's car payment could be like slapping a Band-Aid on a chest wound. You might be treating the symptoms, not the cause -- and your treatment could be meaningless.

"If I give you money and you have a spending problem, I didn't help you," says financial guru Dave Ramsey.

A reader named Nicole learned this the hard way. Shortly after her parents moved to their rural dream home, her dad got fired. After more than $8,000 worth of bailouts, Nicole and her husband closed the bank. They invited the parents to move in, but the older couple wouldn't leave their home or get rid of their horse, goats or fowl.

The reader, who asked that her last name not be used, says her folks now take money from her two siblings -- neither of whom can truly afford it.

"It's 'Oh, we're your parents; we're in such a bad situation.' But I keep thinking this is going on much too long," Nicole says.

Image: Donna Freedman

Donna Freedman

A growing trend

The percentage of bankruptcy filers age 55 or older nearly tripled, to 22%, between 1991 and 2007, according to a study from the AARP Policy Research Institute. That increase was far sharper than the rise in the 55-and-over population during the same period (the portion of the U.S. population 55 and over went from 19% in 1991 to 23% in 2007).

Many people who thought they'd saved enough watched their retirement funds shrivel during the economic downturn. Some are going back to work, if they can get hired. Others ask their sons and daughters for loans.

"There's a lot of shame when our children become our parents," says Philip Dembo, a therapist and life coach in St. Louis.

Although you should acknowledge how hard it might have been for your parents to ask, you should never make a loan you cannot afford.

"It doesn't mean you stop caring about people," Dembo says. "But you take care of yourself first."

Saying no to a parent isn't easy. Many children wouldn't dream of it, especially if the shortfall is due to job loss, illness or a shrunken retirement fund.

But what if the wolf at the door is actually a FedEx delivery driver, a cocktail waitress or a casino pit boss with a fistful of markers? If you're enabling a parent's addictions (chemical, shopping, gambling), you're hurting, not helping.

Wealth psychology expert Kathleen Burns Kingsbury suggests offering help instead of a bailout. For example, you could decline to pay a credit card bill but offer to pay for 10 sessions of therapy for a compulsive-shopping problem.

"It may be that you can negotiate something where you're helping, really helping, instead of supporting unhealthy behaviors," Kingsbury says.

'We just want them safe'

Not every parent who overspends is an addict or a moral weakling. New retirees may find their lowered incomes aren't keeping pace with inflation. Maybe they're lonely and want to be where other people are -- malls, bingo parlors or other places that end up costing them money.

Or maybe your parents never learned how money works. Ellen, who lives in the Southwest, has watched her in-laws make questionable choices, including cashing in retirement funds and buying furniture and appliances rather than paying off their mobile home.

Her mother-in-law was disabled by heart disease a few years ago. Her father-in-law has been unemployed since 2007 except for sporadic contract work. Recently, they couldn't pay for illness-related items, including medication. Ellen and her husband sent money immediately. They're prepared to send more.

"We would have to find room in the budget," she says. "But it is frustrating when we look at their past of spending and not saving."

Ellen and her husband had been saving for a home of their own. Now the goal is to find a place with room for the in-laws. "We just want them safe," she says.

A more insidious loan

Two end runs around the child-as-ATM are the co-sign and the co-opt. Some parents steal a child's identity outright, but Kim's situation was more insidious.

After growing up in a physically and psychologically abusive home, she was unable to resist what she now calls extortion. She quit college to work for free in the family business. Her parents used Kim's credit cards, including taking cash advances, and coerced her into co-signing a bank loan.

Ultimately, her parents walked away from the obligations. It took Kim five years to pay off the debt -- and by then her parents had declared bankruptcy and moved in with her.

Now living in a Southern state with her husband and two young children, Kim has no relationship with her parents because "they have no remorse and no sense of personal responsibility."

Another reader, Ally, caved when her biological mother asked that she co-sign her half-sister's student loans. At first Ally refused. Yet she felt education was important and "didn't want there to be tension in the family," so when her mom asked again, she signed.

Her sister has shown zero initiative about seeking postgraduation employment. Ally, who works in marketing, fears she'll soon be on the hook for $24,000. Recently, she got turned down for a car loan because of the debt that's technically hers.

Ally's mother can't pay. She's broke.

How to lend money

A bank wouldn't give a personal loan without checking the borrower's financial history and prospects for repayment. Do the same for your parents. But be prepared for what Ramsey calls "Powdered Butt Syndrome" -- i.e., parents don't want to take advice or suffer scrutiny from someone whose backside they diapered.

Looking at your parents' finances might feel like an invasion of privacy. But Kingsbury says you and your parents should talk about money openly and proactively:

  • Do they have enough for basic expenses?
  • If something goes wrong, how much (if anything) could the children provide?
  • What options exist if retirement funds run out?

"The silver lining is that we may start talking about what we should have been talking about all along: How do we as a family figure out how to care for someone?" Kingsbury says.

If there is to be a loan, put it in writing. John Graves, a financial adviser with The Renaissance Group, suggests securing the deal with a piece of property.

What, put a lien on Dad's classic Chevy? Yep. That is, if you consider this a true loan. It might end up being a gift, so never lend more than you can afford to lose.

Be the middleman

Other limits may be necessary. Handing a wad of greenbacks to someone who can't manage money is like giving a child a bag of candy and saying, "Eat this after dinner, OK?"

Tina Tessina, a psychotherapist and author, suggests paying part of the rent or mortgage directly to the landlord or bank. Yes, it will be a hassle, and yes, your parents may get huffy. But if they can't use the money wisely, there will always be another crisis.

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"You can't let an irresponsible parent take you down with them," says Tessina, the author of "Money, Sex and Kids: Stop Fighting About the Three Things That Can Ruin Your Marriage."

Best-case scenario: Your parents create a reasonable budget and no loan is needed. (See "The 50/30/20 budget fix" for a simple and effective money-management plan.)

But if the folks resist even temporary lifestyle cutbacks, it's up to you to determine how much you can and will help.

"Sit down with them and say, 'Here are your three options. If you choose anything but these three options, our conversation has to be over,'" Dembo says. If your parents are seriously irresponsible or incompetent (irrational spending may be a sign of dementia), it is possible -- though laborious -- to get a conservatorship or power of attorney. Talk to an attorney if you truly think this is necessary.

What do we 'owe' our parents?

A few years back, Tammy Bradford's mother informed her children that they "owed" her because she was their mother. The adult children lovingly but firmly replied, No, we don't.

"We had to have the discussion of 'We don't owe you. When you have a child you take on the responsibility for that child,'" says Bradford, a certified credit counselor known as "Coach Tammy" for CareOne Credit, a debt management company.

An empty nester anticipating some "me" time, she nonetheless agreed to let her mother move in. Because her mother's retirement income doesn't cover all expenses, Bradford makes up the difference for medications, co-pays, clothes and other items.

But she won't satisfy her mother's every whim.

"If you're helping (your parents) buy groceries, that's a priority. If you're helping Mom go play bingo, that's not a priority," Bradford says.

Here are some strategies for dealing with this emotionally charged situation:

  • Say maybe. Don't commit right away. Tell your parents, "I need some time to look at my budget to figure out what's possible. I'll get back to you in a couple of days."
  • If you need to say no, say it. Maybe you really can't afford it. Maybe you just don't want to do it because of a past history of manipulation or abuse. It's OK to say, "I cannot help you, and I will not discuss it further." Be prepared to hang up the phone or leave the room.
  • If you say yes, set limits. Once you determine that you can give $400 a month, "don't give them $600 because you feel bad for them," says Bradford. That opens the door to additional payouts and may encourage irresponsible spending.
  • Make information available. Banks, credit unions and credit-counseling agencies have pamphlets about budgeting and money management. Bookmark websites such as MSN Money's Saving & Budgeting page and the National Foundation for Credit Counseling's financial education page. Note: Some parents might prefer face-to-face interaction, so offer to drive them to the credit union for a sit-down with a finance specialist.
  • Give the gift of personal finance. Do Mom and Dad listen to Clark Howard or Ramsey on the radio or watch Suze Orman on TV?
  • Emphasize the benefits. Talk about how getting control of your own finances has improved your life. Explain what it feels like to live debt-free, pay cash for a car, save for a child's education -- whatever you think will resonate.
  • Talk about it -- briefly. Do your folks fret about the loan every time you talk together? Kingsbury suggests a 10-minute meeting each month. Mom and Dad get to say how they feel without belaboring the point. Acknowledge their feelings, then move on.

Donna Freedman is a freelance writer in Seattle. You can find more of her writing on MSN Money's Frugal Cool blog and at Surviving and Thriving (motto: "Life is short. But it's also wide.").