Helpful tips for collecting a debt
You lent money to a family member or friend: Now what?
Your sibling asked you to cover their rent while they were between jobs. Or maybe you loaned a friend a few hundred bucks for a car repair they couldn’t afford.
You’d do anything to help those you love. And you did. But what should you do when they don’t pay you back? Consider these options.
Gently approach the subject
Asking a friend or family member for money back may feel uncomfortable. But sometimes a simple reminder is all it takes to jump-start debt repayment.
Before reaching out, think back to the discussions you had when you offered the money: Did you make it clear that this was a loan, not a gift? Did you confirm payment terms and a deadline? Did you get the details in writing?
Framing the conversation around facts rather than your feelings, or unspoken opinions, can prevent confusion. No matter the context, bring up the issue calmly and privately and avoid making assumptions. Using harsh or accusatory language cannot only strain the relationship, but it can also make your loved one less likely to pay up.
“What we have to do is create space for that individual to come out of a shame mindset and perspective, and become less avoidant to engage in a healthy conversation,” said Michael Thomas Jr., an accredited financial counselor who teaches in the University of Georgia’s financial planning program.
Acknowledge what’s happening in your loved one’s life and be upfront about your own situation. Then, you can discuss how to move forward. “I think the best approach is just to come at it with a lot of empathy and understanding that you’re both in it together,” said Thomas Nitzsche, director of media and brand at Money Management International, a nonprofit financial counseling and education service.
Make, revise payment plan
Ideally, before lending them money, you’d have made a loan agreement outlining how much the borrower owes, how they’ll pay, when payment is due and what to do if they can’t pay.
If not, or if the person can’t meet the original terms, work out a new plan. Consider extending their deadline or allowing them to make smaller payments. Thomas said setting up automated payments through a peer-to-peer platform can make it easier to be repaid over time.
Forgive the debt
Working out an arrangement can be stressful, especially if your loved one doesn’t come through. Waiving the debt could be the best move for your peace of mind and relationship. However, you might reconsider giving this person, or anyone, money again unless you’re prepared to lose the amount. Think carefully about how forgiveness would impact you.
Legal action, as a last resort
Thomas doesn’t advocate suing friends or family in most cases. But that path might be worth exploring “if there are large sums of money on the table and there is an individual who you have reason to believe has the capacity to pay,” Thomas said.
“The quickest and cheapest way to get a money judgment is through the small (claims) court system,” O’Neill said.
If the loan amount exceeds the small claims limit — $5,000 to $10,000, depending on the state — the case will take significantly longer and be more expensive, O’Neill said.
Even if you get a judgment in your favor, that doesn’t mean you’ll get your money back, Nitzsche said, particularly if the person who had the judgment against them is on certain types of protected income, like disability or Social Security. That creates an extra wrinkle because you can’t get a garnishment against wages.”
If you go this route, prepare to burn bridges. Will it be worth it if you get your money back? Will it be worth it if you don’t?