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

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. All of us struggle with money issues from time to time, and most of us have all been there at some stage in our lives.

Every year, over $89 billion is loaned between friends and families in the US, according to the Federal Reserve Board Survey of Consumer Finances. It takes a lot of courage or desperation to ask for money so before you decide upon whether to lend it to them or not, take some time to think about 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.

Table of Contents

1. Choosing whether to say YES or NO
2. How to just say NO
3. The best way to lend someone money
4. How to collect a debt

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 out 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 yourself about the relationship you have with that person. It’s important to think about 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 the debt will be recovered 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. Depending on the context and the amount being borrowed, understanding what they will be using the money for is extremely important. Perhaps the money will 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 even 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 be useful in determining their capacity for repayments. Will they actually 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 in the future.

Assessing your own finances

Before loaning money, ensure you are in a financial situation to do so. It seems obvious, but you need to be financially stable yourself in order to loan money out. Perhaps the loan is only for a small amount of money which won’t affect your quality of life or your own mortgage repayments and living standards. If the loan is for a few thousand dollars on the other hand, 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 are not able to pay you back.

In some cases it may actually be better off for you to loan them the money and receive regular repayments, as it may allow you to better manage your cash flow. How are your finances going? You may have to think about any upcoming bills or events where you might actually need the money for yourself, so think about your own financial situation before loaning it out. Please note, 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 just 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. If the loan isn’t extremely urgent (e.g. a hospital emergency), it might give the borrower time to find other funding sources. Not that you don’t want to help your friend immediately, but to avoid loaning a friend or family member money is generally advised. 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 may not be in the position to 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, so if you can’t provide it monetarily, giving them some guidance as to how they can solve their financial problems can be beneficial. You could also visit a financial planner with them if you feel it could help.

Don’t feel guilty. Everyone handles their money differently, and we all have differing levels of income. Perhaps you simply 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. Don’t dwell on how bad you feel for the other person as this situation could also serve as 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 always offer to help them 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?

Trying to work through these questions with your friend or relative can assist them in sustaining their finances in the long term, and hopefully saving 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 important 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. Providing your family member with advice on how they can improve their financial situation in the longer term can result in them getting out of a sticky situation, for now and in the future. So don’t be an enabler and help your friend to make a budget and stick to it.

Leaving a paper trail

As much as it seems awkward to bring it up, when you are lending anyone money, regardless of whether they are a close friend or a distant relative, it is advisable to leave a paper trail of the transaction, some form of legal document 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 it must be paid by. 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 for some reason there is a discrepancy between you. The type of form you use depends on the amount of information you require. The loan agreement is the most detailed of the three forms, requiring the signatures of both parties, the date/s of payments, if there are any penalties for late payments and liability. For more information about the types of forms you might need visit our 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’re most likely going to 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 serious tension between you. So the way you handle it will most likely decide the outcome of the situation.

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 to use 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 not only create further tension but will most likely disempower them further.

Like anything in life 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 key, remembering that ultimately money should never come between loved ones.

Tips on getting your money back