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.").