When a Private Personal Loan Goes Unpaid: How to Collect a Debt From Friends and Family Members

Most people are well aware of the fact that being asked for payday loans from friends and family is not a pleasant experience. Not only is the pressure to lend greater when the request for money comes from a loved one, but the odds of being repaid may also be lower. Options do exist, however, to help individuals recover private personal loans.

Give the Borrower Constant Reminders to Pay Back the Loan

One common reason that loans to friends and family do not get repaid is that it is much easier for a borrower to forget that he borrowed than for a lender to forget that money is owed. This often results in the lender feeling resentment toward the borrower when the borrower has forgotten all about the private loan he received.

It is imperative that an individual not allow a borrower to forget that he needs to repay a loan. This can be done without malice or a threatening tone. Even a joking reference to the money should be enough to jog the memory of the borrower and hopefully result in the amount borrowed being repaid.

Offer Alternate Methods of Repaying the Private Loan

Although loans to friends and family members are often distributed in lump sums, it may be challenging for a borrower to repay the debt in the same manner it was received – especially if he is still experiencing a financial hardship. Individuals attempting to procure repayment from loved ones should therefore offer alternate methods of repayment.

  • Allow the debtor to work off the debt. This may be necessary if it is impossible for the borrower to repay any portion of the amount he owes in cash. Individuals are well within their rights to request that the borrower pay off the debt in another manner, such as providing them with physical labor or professional services that they would otherwise have to pay for.
  • Offer a debt repayment plan. Smaller debts are less intimidating to pay off than large debts. In addition, some people find it impossible to save money. This makes paying the debt in a lump sum impossible.
  • Reduce the overall balance of the debt. If an individual is willing to forgive a portion of the amount owed, the borrower may be able to repay the reduced amount. This is far from the ideal, but it is also preferable to not being paid at all.

File a Lawsuit For the Unpaid Debt in Small Claims Court

When an individual exhausts all of the private collection methods available to him, he may seek legal redress for the personal loan through his local court system. An attorney is not necessary for a small claims lawsuit. Should an individual opt to hire one, however, he can include his attorney’s fees in the lawsuit.

It is not vital to have a signed contract from the debtor in order to file a lawsuit through small claims court. It is, however, necessary to have some proof that the amount loaned was not a gift. This is vital if the borrower states that the loan did not occur. Proof of the loan other than a signed contract may be a copy of a cancelled check that identifies the amount as a personal loan in the text box rather than a gift. A good attorney can inform a plaintiff what documentation can and should be used for this purpose.

The Results of Private Debt Collection Methods May Be Unpleasant

Individuals attempting to collect a debt from a friend or family member should expect tension throughout the process. If the case ends up in small claims court, it is very likely that the original relationship will sustain damage. Individuals should carefully consider the value of the borrower’s company before taking any legal action. In some cases, it may be preferable to simply let the unpaid debt slide and resolve to never again lend to friends and family.

One benefit of allowing the debt to slide is that the lender has the right to claim the unpaid debt as a tax deduction. The IRS website details how to claim a bad debt tax deduction in “Topic 453 – Bad Debt Deduction“. The IRS, however, is likely to pursue the borrower for taxes on the unpaid amount.

Individuals attempting to collect from loved ones should also take the age of the debt into consideration. Even private debt collection has legal time limits.