I'm 54 with zero savings, $90K in debt and my business is struggling — now my kid wants to go to university and I'm scared to tell her that I can't afford to help. What are my options

Imagine a scenario where Sarah, 54, runs a struggling business, is $90,000 in debt and has zero savings — and now her daughter is starting to look at universities.

Sarah has managed to hide her dire financial situation from her daughter, who is blissfully unaware that her mom is deeply in debt. While Sarah doesn’t want her daughter to end up with a ton of student debt — she’s well aware of how debt can weigh a person down — she doesn’t know how she could cobble enough money together to pay tuition.

She wishes she had opened a Registered Education Savings Plan (RESP) — a tax-advantaged savings plan that helps families save for future education expenses — years ago. It’s too late for that option, but she’s wondering if there’s anything she can do to fix her financial situation.

Face the music

One of the first things Sarah needs to do is accept the reality of the situation. She needs to be honest with herself — and with her daughter — about her financial situation and then come up with a plan to fix it.

Since federal student aid is based in part on financial need, Sarah’s daughter could be eligible for loans, grants or work-study funds.

Even if she can’t afford to pay for her daughter’s tuition, Sarah could potentially help out in other ways. For example, if her daughter goes to a university close to home, she could live with her mom and save money on housing and meals.

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Tackle debt head-on

Part of facing reality is tackling your debt head-on. That means tallying up all of your debts, including balances, interest rates and payment terms. Sarah has a few options here, such as consolidating her debt into a single loan, with one monthly payment (in this case, she may be able to negotiate a better interest rate or better terms).

She could also tackle debts one at a time with the snowball or avalanche repayment methods. With the snowball method, you pay your smallest debt first, making minimum payments on everything else. Once that’s paid off, you move on to the next-smallest debt, and so on. With the avalanche method, you pay off the debt with the highest interest rate first.

She could also work with a credit counselor to enroll in a debt management plan for unsecured debts, including credit card debt. In this case, she’d have a regular payment schedule, and she may be able to negotiate rates and fees. However, exercise some caution if a counselor offers this as your only option before performing a detailed review of your finances.

Find a consistent income stream

If Sarah’s business is failing amid a climate of economic uncertainty, she may want to consider selling the business or shuttering it and liquidating any assets. From there, she could look for a job with a more consistent income.

If she thinks she can turn her business around, she could consider a side gig in the meantime to help her make ends meet. If that would stretch her too thin, she could consider passive income streams. For example, if her daughter moves out to go to university, could Sarah get a roommate to bring in some extra cash?

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Only consider bankruptcy as a last resort

Declaring bankruptcy is usually considered a last resort, and Sarah may want to exhaust all other options before going this route. While this can offer some relief from overwhelming debt, declaring bankruptcy comes with long-term consequences.

There are two types of bankruptcies she could opt for. First, is personal bankruptcy which assigns assets to a Licensed Insolvency Trusty who then distributes funds to creditors, and is governed the Bankruptcy and Insolvency Act (BIA). The other is a Consumer Proposal, a formal, legally binding process also governed by the BIA, and is an alternative to bankruptcy. It involves creating a repayment plan with creditors wherein you usually pay a reduced amount over a specified period of time.

But proceed with caution.

“If you include secured debt, such as a mortgage loan or auto loan, in your bankruptcy filing, you could also lose the property or vehicle you used as collateral for the debt,” according to according to Experian. Plus, it can stay on your credit report for a chunk of time damaging your credit score and affecting your future ability to borrow money.

Create a plan for rebuilding

Whatever option she chooses, Sarah should also consider creating a multi-year plan to help her rebuild, which could include a debt consolidation or debt management plan.

To do this, she’ll need to know how much she’s bringing in, how much is going out (expenses and debts) and how much she can reasonably set aside each month for savings and investments.

Having a multi-year plan could help her see the light at the end of the tunnel, rather than feeling stuck and despondent. And being able to meet small, achievable goals over a set period of time could make it easier to stick with this plan.

This is where it could be helpful to work with a financial planner or credit counselor to create a realistic plan for the future. If she can’t afford a financial advisor, there may be free credit counseling services that could help.

Sources

1. Experian: Bankruptcy: How It Works, Types and Consequences (Jan 5, 2024)