Dealing With a Disabled Son's Debt

Becoming disabled can wreak havoc on your finances. Here's how to recover.

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Dear Alpha Consumer,

About eight months ago our son, who is 45, suffered a brain injury, resulting in the loss of short-term memory. He was between jobs, which caught him with no assets and no insurance but about $20,000 in credit card obligations. He is unmarried and has no children.

Although he may get some rehabilitation to develop coping skills, it is also quite likely he will spend many of his future years in some sort of institution. He is presently receiving Medicaid and Supplemental Security Income disability payments. The prospect for greater earnings is not good.

Since it is very probable that he will never earn significant income and most likely will remain unable to manage debt, is there any reason to worry about his current financial predicament?

Becoming disabled is one of those events—along with divorce and death—that not only cause incredible emotional upheaval but can also destroy people financially, which only compounds the original trauma.

The first step during such chaotic times is to slowly wrest back control. In your son's situation, the most pressing question is the $20,000 in credit card debt. If you start to ignore the monthly payments, then they will pile up and quickly become unmanageable, if they aren't already. Call your son's bank or lender and explain the situation. Ask if they can offer new terms.

Their level of generosity will depend on the lender. John Hall, spokesman for the American Bankers Association, says banks will want to help customers avoid bankruptcy, but they also can't always forgive debts when asked.

Because your son has little chance of paying back the debt, they may be willing to make an exception, says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling, which helps people deal with debt. The fact is, she says, the bill is not going to get paid. From the bank's perspective, it will end up writing it off, either because of a bankruptcy filing (more on that in a moment) or just because the bill is ignored. If the bank decided to press the matter in court, a judge would not necessarily side with it, given the circumstances. So, says Cunningham, her first recommendation would be to have a "heart to heart" with the lender to try to get the debt erased.

If that doesn't work, another option is, in fact, to ignore it. As crazy as that may sound, it may not matter if your son has a bad credit score. In fact, says Cunningham, it could even help him receive more government benefits down the road.

As for the "B" word, filing for bankruptcy involves a lot of paperwork. But if allowing the debt to pile up makes you uncomfortable—and I admit, it would make me a little uncomfortable—bankruptcy may be worth the effort. It will wipe out the debts and temporarily lower your son's credit score.

Since the disability has already occurred, it's too late to take out disability insurance, but it can be a good option for nondisabled people looking to reduce their risk of finding themselves in this kind of situation. According to the Council for Disability Awareness, we are 2½ times more likely to become seriously disabled than we are to die before age 65. In fact, 3 in 10 people will suffer a long-term disability at some point during their careers.

And yet, says Bob Taylor, executive director of the group, "people have not developed a reserve to manage this contingency." There are options, though: Many workplaces offer disability insurance at reduced rates. Insurers also offer plans privately.

Ron Buerges, executive vice president of Allsup, which represents people applying for Social Security disability insurance, says about 30 percent of workers buy long-term-disability insurance. Most policies pay about 60 to 70 percent of salary levels in the case of disability. Buerges says the application for Social Security disability insurance typically takes between 12 to 24 months. People who have paid Social Security taxes during their working years are eligible if they become disabled. (Allsup, like other companies, charges a government-regulated fee that is 25 percent of retroactive benefits up to $5,300.)

Meanwhile, make sure you're getting all of the support you can. Your son may qualify for the Social Security disability insurance in addition to Medicaid and Supplemental Security Income. National and local organizations focus on dealing with brain injuries; contact the Brain Injury Association of America for more information.

And don't forget to take care of yourself. Disabilities can place financial strain on other family members, too, but draining your own savings won't solve the more long-term challenge and may threaten your own solvency.