How to collect debt: What to do when someone owes you money

We struggle with money issues occasionally, and most of us have all been there at some stage. You’ve found yourself in a situation where a friend or family member has asked to borrow money from you. Or perhaps they didn’t even ask but have hinted they’re in desperate need of some cash.

According to the Federal Reserve Board Survey of Consumer Finances, over $89 billion is loaned annually between friends and families in the US. It takes a lot of courage or desperation to ask for money, so before you decide whether to lend it to them, consider how it may affect the relationship. If you have already lent someone money, read on for tips on how you can recover the loan without damaging the relationship in the long term.

Choosing whether to say YES or NO

Assessing the Relationship

“By treating loans between family and friends as a business transaction, consumers can safeguard themselves from damaging an important relationship because of money. Although you might feel inclined to help a loved one with finances, it’s important to openly communicate about repayment expectations so that no one is left in the dark or – worse yet – in the red,” says Steve Trumble, CEO of American Consumer Credit Counselling.

Before lending your friend money, ask about your relationship with that person. It’s essential to consider these questions before deciding whether or not to lend them money. The answers you arrive at may shape the nature of the relationship in the future, so think carefully about the following;

• Will the debt affect the quality of your relationship?
• What happens if they can’t pay you back?
• Will it create a rift between you?
• How will you deal with it when this happens?
• If they’re your spouse or family member, how can you ensure the loan doesn’t create a power imbalance that fuels arguments in the future?
• If they’re a close friend, how will you ensure you will recover the debt without needing to remind them every time you see them?
• Does the money mean more to you than the relationship?

Understanding their financial situation

Another important aspect worth taking into account is their financial situation. Understanding what they will use the money for is extremely important, depending on the context and the borrowed amount. The money may be used for a legitimate reason, like children’s school fees, being behind on mortgage repayments, or a car that needs fixing. Or perhaps they might have a gambling or some other form of addiction you and their family may not know about. Before lending them the money, speak to their family members and see what information you can gather.

Understanding their financial situation can also help determine their capacity for repayments. Will they be able to pay you back by a specific date or at least in installments? They may feel like they can pay you back at the time, but in reality, they might not have a clear picture of their finances and might require extra loans or extensions.

Assessing your finances

Before loaning money, ensure you are in a financial situation to do so. It seems obvious, but you must be financially stable to loan money. Perhaps the loan is only for a small amount, which won’t affect your quality of life, mortgage repayments, or living standards. On the other hand, suppose the loan is for a few thousand dollars. In that case, you may need to assess whether or not you can afford to give the money away in the first place, living without repayments if they cannot repay you.

How are your finances going? In some cases, you may be better off loaning them the money and receiving regular repayments, as it may allow you to manage your cash flow better. You may have to consider any upcoming bills or events where you might need the money, so think about your financial situation before loaning it. Please note that the loan you are given is not considered taxable income unless it is ‘forgiven’ and is considered COD or cancellation of debt income.

How to say NO

Taking your time

Before saying no to your friend or relative, take some time, say a day or two, before replying to their request. Not that you don’t want to help your friend immediately, but to avoid loaning a friend or family member money is generally advised. If the loan isn’t highly urgent (e.g., a hospital emergency), it might give the borrower time to find other funding sources. Giving yourself some time will also enable you to assess your financial situation and, if necessary, find the funds you’re lending.

Tips on just saying NO

Be clear about why you can’t lend them money. For example, “I’m so sorry, but I have to pay my phone bill this week, so I can’t lend it to you.” This will enable them to understand your financial situation and realize that you cannot lend them the money right now.

Suggest alternative sources of funding. For example, “Have you tried Uncle Sam? He might have some money he can lend you.” Or you could suggest, “Maybe you could have a garage sale?” Always remember this person is reaching out to you for help if you can’t provide them with money; at least guide how they can solve their financial problems. You could also visit a financial planner with them if you feel it could help.

Don’t feel guilty. Everyone handles money differently, and we all have different income levels. Perhaps you cannot afford to lend them the money right now. Don’t feel bad. And don’t allow them to make you feel bad. Although you may be better at saving or paying off your mortgage repayments, you don’t need to feel guilty that they are not as savvy with their money. If you have the means, then, by all means, loan it to them, but if you don’t, then you don’t. Please don’t dwell on how bad you feel for the other person, as this situation could also serve as a lesson they need to learn in managing their finances in the future.

Help them manage their money better. If you can’t loan them the money, you can consistently offer to help in managing their finances.

• Are they living beyond their means?
• How are they balancing out their income with living requirements?
• Are they always worried about money? Why can’t they make ends meet?
• Are there ways they can avoid being in this situation again?

Friendship requires time and effort. So pay attention to this person and try to read between the lines. What are the underlying issues that might be recurring?

• Do they have an addiction that needs to be addressed?
• Where can they save money in their day-to-day spending?
• Do they need to have a look at their position at work?
• Are they being paid enough? If not, and there is no clear pathway for a pay raise, how can they generate more capital through secondary sources of income?

Working through these questions with your friend or relative can assist them in sustaining their finances in the long term and hopefully save them from needing to borrow money again in the future.

The best way to lend someone money

A note on being an enabler

When you loan money to a friend, it’s essential to understand that although it may help them in the short term, you are essentially providing them with a quick-fix solution to what may be a long-term problem.

Giving your family member advice on how they can improve their financial situation in the longer term can result in them getting out of a sticky situation. So don’t be an enabler; help your friend make a budget and stick to it.

Leaving a paper trail

Reminding people of their debt might feel awkward, whether they are close friends or distant relatives. When you are lending anyone money,  it is advisable to leave a paper trail of the transaction and some legal documents alongside the repayments made.

Depending on the amount borrowed, you should request the borrower sign a legally binding document stating the amount owed and the date the borrowed amount must pay it. You can choose to use either an;

• IOU form
• Promissory Note
• Loan Agreement

All three of these forms will enable the transaction to be traced and used as evidence in court if there is a discrepancy between you. The type of form you use depends on the information you require. The loan agreement is the most detailed of the three forms, requiring both parties’ signatures and the date/s of payments if there are any penalties for late payments and liability. For more information about the forms you might need, visit the financial section of our legal documents page.

How to collect a debt

When you have lent a friend or relative money, and they are not paying you back, you will likely have to rely upon your negotiation skills to try and recover the debt. This can be tedious and, depending on the nature of the relationship, can either bring you closer or can create severe tension between you. So how you handle it will most likely decide the situation’s outcome.

When collecting from a friend or relative

Always avoid using unnecessary aggression when asking for your money back. Although it may be frustrating when they’re not meeting payments and missing deadlines, you should try firmness and persistence when asking for the money back. Being aggressive, using verbal abuse, or guilt-tripping the person into giving the money back will create tension and most likely disempower them further.

Like anything, getting your money back, especially from someone who may be a friend or relative, takes patience. Maintaining a balance between asking for the money back and understanding their situation is advisable. Keeping your perspective of the situation is critical, and remembering that money should never come between loved ones.

Tips on getting your money back