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Money 911: How to handle your parents' debt

TODAY financial editor Jean Chatzky, CNBC's Carmen Wong and David Back, author of offer advice on protecting your credit, paying down debt, investing and more.
/ Source: TODAY

How should you handle your parents' debt? What should you do if a store changes the due date of your bill? TODAY financial editor Jean Chatzky, CNBC's Carmen Wong and David Back, author of "Start Late, Finish Rich," offer advice on these timely issues, plus wise words about protecting your credit, investing and more:

Q: I just recently took on a new job with a small company after being recently laid off back in June from a company I had been at for seven years. They currently do not have a 401(k) plan in place. I was wondering if you can give me some advice as to what I can do with my money to take the place of this very important retirement feature. Marshander, New Jersey

Carmen Wong: Build your own 401(k) with either a Roth IRA or a traditional IRA. A Roth IRA is your first choice but has income restrictions and contribution limits of $5,000 for 2008 or $6,000 if you're 50 or older.

Roth's take your post-tax money (say from your paycheck), let it grow tax free and you withdraw tax free — you never pay taxes again!

A traditional IRA allows your money to grow tax-free, though you pay taxes upon withdrawal.

Q: My question is that my husband and I just had a baby and bought a house six months ago and with the shaky market today, we were wondering if we should try to pay down our mortgage as much as we can or keep the liquid cash on hand?Newy, Florida

Jean Chatzky: Cash on hand is king — not just because of today's rocky economy, but because the question you need to ask yourself is could I get more for the money doing something else than paying down the mortgage. Let's say that mortgage is at six percent. After tax, it's likely costing you four percent.

The question you have to ask yourself is could I get a better return on my money elsewhere? Eventually, this market is going to come back. Therefore, by buying good companies on the cheap, not just U.S. companies, but worldwide, or even high-grade corporate bonds and putting that money where it could grow tax-deferred in an IRA or 401(k), my guess is the answer is absolutely yes.

I am completely convinced — despite the rollercoaster — that the money I am investing right now is going to be my salvation for both college for my kids and my own retirement.

Q: When elderly parents die with huge amounts of debt, secured (house/car) and unsecured, where (or to whom) does the liability fall?Patricia, Indiana

David Back: The simple answer is debt obligations of a parent to not automatically become a child's obligation. They do however become the spouse's.

If the parent dies and the child is the beneficiary of the estate creditors may come after you as the beneficiary. If the estate has no assets, there is nothing to easily come after the beneficiary for.

Q: Why do stores change the due date of your bill? For example the due date on my bill has always been the 18th of the month but last month it changed to the 11th of the month. I called them but they won't change it back. Lori, Ohio

Jean Chatzky: It's not just that they're changing the due date of your bill, they're shrinking your grace period. This has been happening pretty steadily over the past few years. Card companies that used to give you 30 days to pay your bill trimmed that back to 25 and now some are going to 20 days.

It's very important to watch this for several reasons. One, paying late can result in late fees being racked up. They can be as high as $39 — do that month after month and you're looking at nearly $500 a year. Two, paying late can ding your credit score — particularly if it's chronic. And third, paying late can result in your interest rates on this card as well as the others in your wallet being hiked sky high. The new credit card bill of rights will change some of these practices. Unfortunately, it doesn't go into effect until 2010.

One thing you may want to do — ask the card company to change your whole billing cycle. This won't increase the now shortened grace period. But it may help you to receive the bills closer to the time you receive your paychecks.

Q: Our college savings account is underwater at this point (less money in it than we put in) and we have a college student who needs the money. Should we take the money out anyway, or take a loan in the hope that our account will go back up?Denise, Virginia

David Back: Most 529 plans from last year are down somewhere between 25 to 45 percent depending on how they were invested. I would suggest that now is not the time to sell out your plan. But there is a great lesson here for anyone that has a student going to school in the next three years: having your 529 Plan invested in stocks or aggressive asset allocation is very risky. The downside from here with the stock market at 8,000 could be significant. I personally believe we could see the Dow go down in the next six months another 10 percent to 30 percent. A Dow at 6,000 is not impossible.

If you can't stand to see your account go down more then now is the time to move your 529 plan to a fixed rate and take out what you need.

The issue of borrowing depends on what you can borrow and at what rate? You want a fixed rate. Student Loans are getting harder to get but the rates are still low and can be lower then 7 percent. Start with Sallie Mae the largest provider of funds for education

I would look into also financial aid. The number one site for government financial aid is FASFA stands for Free Application for Federal Student Aid.

Q: I have some credit card debt I am trying to get rid of. I have a line of credit (from house expenses) that is at $14,625 at 13.99 percent and a credit card that is at $14,301, most of which is at 0 percent but when the 0 percent expires will go to 12.99 percent. Which would be the better one to pay off first? Brandon, Wisconsin

Carmen Wong: The most efficient way: concentrate on the card with the highest interest rate.

  • 13 or more percent should get as much of your money as possible to pay it off
  • Pay the minimum on the 12.9 percent card (once the rate gets raised from 0 percent
  • Once you're done paying off the first card, take the money you've been putting there every month and sock it to the next card — all of it!
  • What helps your credit score the most is lowering your debt load — more so than what kind of credit card it is (secured vs. unsecured)

Q: Where do young families struggling with home mortgage payments go for help when their current lenders tell them there is nothing they can do for them? How do they access some of this "bailout" money?Kathleen, Utah

Jean Chatzky: If I had a dollar for every time someone has said to me in recent weeks, "Where's my bailout?" Unfortunately, that's not the way it seems to be working. What you need to do is the following:

A) Call your lender. I know you've already been told that nothing is happening here, but call again.

B) The second thing to do is call your other creditors. Your credit card companies can tell that you've been having trouble paying your mortgage. They also know that you will pay the mortgage before you pay them and so they may be willing to come to the table and make a deal. Over the past month or so, we have noticed a much greater willingness in those card companies to deal.

C) Track the money. If you haven't gone through the basics of figuring out where your money is going to free up some cash, figure out what you can sell to find extra income, etc., that's something you should do tomorrow!

Q: Despite home values falling, my property tax assessment has remained the same. If my home would actually sell for $10,000 or $20,000 less than the current tax assessment value, am I paying too much in property taxes? What can I do?Ed, New York

David Back: Get your property taxes re-assessed. Start by contacting your agency that sent you the tax bill and applying to have your property re-assessed. This is exactly what is happening all over the country right now. And you are absolutely correct, it is possible you are paying taxes right now on an assessment that is 10 to 20 percent higher. We did this with our building in Tribeca and the condo owners all got their tax bills lowered.