Raise great teens on a debt management plan, without declaring bankruptcy

The New Yorker, a magazine widely read in Manhattan, Brooklyn, Queens, and Nassau, NY – but also popular across America – had something to say about raising children in the 21 st century: “[People who have children] are in worse economic shape than they’ve ever been in,” the Aug. 2003 article declared.

This bold statement just might be true. Harvard professor and bankruptcy guru Elizabeth Warren says that the rate of bankruptcy declaration for families has risen 400 percent since the early 1980s – a period during which there was a birth boom that produced the teens and twenty-somethings we today call 'Millennials.' Bankruptcy counselors can help at that point – but you can take some steps to preserve your credit score and manage your debts while raising savvy young adults BEFORE declaring bankruptcy.

According to the Center for American Progress, in 2006, families were being pushed towards bankruptcy because of rising mortgage interest rates, as well as a sluggish job market and personal debts amassed by couples who bought more house than they could manage. The current housing market is a bum deal, no doubt. But, like all other economic indicators, the housing market is cyclical. It will right itself in due time.

Meanwhile, the cost of living – including goods and services – continues to climb. Penny-pinching companies cut back on amenities like maternity leave and paid child care, and college tuition rates are at all-time highs. In fact, collegefinancialaidguide.com reports that tuition rises at twice the rate of inflation -- and with no market pressure to keep tuition affordable, colleges out-do each other by piling on the costs. How's a debt management savvy parent to plan?

Bankruptcy by tuition bills: Avoid it; incorporate college into a sensible debt management plan

You can use 529 savings accounts to reduce the cost of college for kids, according to National Public Radio correspondent and Washington Post columnist Michelle Singletary of “The Color of Money.” 529s come in two forms – savings and prepaid 529s. Prepaid tuition plans lock in the tuition rate you will owe at state schools at the time you begin investing. If your child shuns state school, the money can be transferred to schools that accept the prepaid 529s – but, your child will pay that school's current tuition rates for the year he or she begins. Savings 529 plans permit you to rack up tax-deferred savings to be used at any school, at any time.

529 accounts are exempt from federal taxes AND most state taxes, which fits nicely into a debt management plan. And, you might be pleased to know that even if your child decides against college completely, the money is not wasted – you can transfer the account to another family member.

If you can't afford to save for college, the answer is simple: don't. You are not obligated to provide for your child's post-secondary education. Many money experts, such as John Rosevar, who contributes to The Motley Fool, advise cash-strapped parents to take care of their own debt management plans and retirement savings (including credit card debt, IRAs and 401Ks, and other money market accounts) before helping their kids through college.

The logic behind this surprising statement: Many college grants and scholarships are awarded on the basis of income. Sources such as The New York Times and the Dayton (Ohio) Daily News state that forgoing college savings accounts can actually help your children financially – while helping you evade bankruptcy and manage your debt. The amount of money you have saved for your child's education impacts his or her eligibility for certain financial aid packages. You might wind up paying less if you let your child pay his or her own way through a combination of grants, scholarships, and loans. Encourage your child to research and apply for scholarships – there are a surprising array of offerings available for students, depending upon gender, race, life experience, and/or special talents. And remember – there are always junior colleges and technical or trade schools, in addition to the big-name, four-year players, too.

 Include your kids in your debt management plan

 Once your kids are teenagers, they can begin to help you out financially. With your debt management or credit counselor, examine your budget, and see where your kids figure into it. Are you spending extra money each month to pay for house cleaning services, or to get after-school care for your eldest child's younger siblings? Have your kid help out, instead. And, you don't need to feel financially obligated to reward him or her for the efforts, either. Your child will learn important life skills that he or she can bring to college, adulthood, marriage, and even, his or her own child-rearing experiences.

By the time your child is 16, he or she can also get a part-time job to help out financially. Some families, on the verge of bankruptcy, will require this additional, teen-earned income to meet their daily and monthly expenses. If you find yourself in this situation, have an honest talk with your child about how he or she will need to contribute, and definitely go out of your way to praise him or her for all of the help. Families who are following debt management plans or are enrolled in credit counseling, but who don't have dire financial situations just yet might find that they can cut back on discretionary spending by having their kids work to earn goodies. Not a bad plan, eh – especially for debt management!