Family and Friend Debt: What you should consider before you lend or borrow

The Bank of Mum and Dad on the Rise

An annual survey carried out by the Financial Conduct Authority, known as the Financial Lives Survey, has this year looked at the impact of the Coronavirus on consumer spending and borrowing, and has found that by October 2020, approximately 5.9 million people across the UK borrowed from family and friends.

Although borrowing from family and friends can be an easy way for many, especially the young, to make ends meet, it is also a practice that can be fraught with dangers.

The most obvious of these is if the money is not repaid, this often leads to broken relationships.

So, what is the Legal Position?

In Scotland the legal position is family and friend loans are legally recoverable, like any other loan. In fact, the law presumes when you give someone money, even an adult child, that money is a loan and not a gift. This is because under Scots Law there is a presumption against gift.

That means that in the absence of any evidence to the contrary, if you can prove you provided someone with money, then the assumption is it was a loan and not a gift.

It is, therefore, safer where someone is giving you money as a gift, that you ask they confirm that in writing.

Insincere Giver

The problem is not that someone who gives you money may be insincere and later request the money back, the problem is people may have a different understanding of the basis on which the money was being provided, so it is important to be clear at the outset.

Also, you need to also remember that it may not always be the “giver” of the money who later comes back looking for it to be repaid. Where the amount is significant, there are circumstances when someone else may treat the gift as a loan.

This may happen if the person who gave the money passes away. One of the roles of an Executor of a deceased person’s estate is to recover any debts owed to the deceased person. So, if they see a large sum of money being given to someone, unless there is proof that money was a gift, legally they may have to assume it was a loan and demand repayment. Likewise, this can also happen if the person that you loaned the money to is later made bankrupt, as their Trustee will have a similar role to an Executor in a deceased person’s estate and must recover all debts.

This can also happen where a parent may help a child by giving them a large sum as a deposit towards their first home. This may reduce any possible inheritance for other siblings, who when the parent passes away, may assume it was always to be repaid, or at least should be offset against any bequests left for the child that was given the money.

Friendship Destroyers

However, the other big problem with family and friend debts, is they are often loaned because someone is in financial distress. The borrower often will turn to family and friends specifically because they are experiencing financial difficulties and cannot borrow from elsewhere.

Unsurprisingly, therefore, it’s normal someone may struggle to repay the debt and because of this, the potential for close relationships to be damaged is created.

Also, the borrower may have other financial liabilities they have to pay, but the family or friend may expect their debt to be prioritised over other lenders.

What is Good Practice when Lending to Family and Friends?

When lending to family and friends, it is quite easy to feel put upon and placed in an impossible position.

The first thing you need to do is ask yourself can you afford to give the money in the first place?

There is a strong possibility that if someone is borrowing from you, it is because no-one else will lend to them, so there is a strong possibility you may not be repaid.

If this is the case, think how it may affect your relationship with this person.

It may be worthwhile, first, to offer the person advice, before you give them any money. Would they be better seeking advice from their local Advice Agency? Could they help them deal with their other debts? Could they see if they are entitled to other sources of funds, such as Community Care Grant or Crisis Grant from the Scottish Welfare Fund? These don’t need to be repaid.

Alternatively, the Local Authority may operate schemes that can help people get top ups on their electricity and gas or can make a referral to a local foodbank for them. They may also be able to identify other benefits they are entitled to.

Equally, has your family or friend considered borrowing from someone else, such as your local credit union? Possibly they could also help.

However, if these other sources of help are not available, and you do feel you can afford to give this person money, ask yourself, do you need it back? If this is a close friend or family member and you do want to help them, possibly the kindest thing to do is make it a gift. If you decide this is your intentions, make it clear to the person in writing the money is being given to them as a gift.

However, if you do decide you will need the money repaid, equally make it clear to the person, this is your intention, and the basis on which you want the money repaid. Tell them the amounts each week or month and of any interest you want to charge them (although be careful, as you could later be accused of being a loan shark or illegal money lender).

What to do if you are not Repaid?

Finally, what do you do if the person who borrowed from you starts missing payments, ignoring your calls, and generally trying to avoid you? Or what if they claim the money was always intended as a gift and accuse you of being an insincere giver?

Well, first there is the presumption against gift in Scots Law, so if they have not got something in writing to say the money was intended as a gift, then legally it will be considered a loan. However, you will also need evidence to prove you gave them the money and how much. So, again it is better you have something in writing or can evidence, possibly through a bank transfer, that you loaned them the money.

Second, you need to ask yourself why the person is not repaying you? There is a strong possibility the reason they borrowed from you was because they were having financial difficulties, so things may have got worse. Would it be more helpful for both you and them if you were to possibly help them to get debt advice? Or maybe you should just write the loan off and make it a gift and save your relationship?

But ultimately, if you find they won’t communicate with you, is there another family member or friend that could mediate between you and try get them to fulfil their obligations to you? You may have to be realistic, possibly the terms of the loan, how much they were to repay you, will have to be rescheduled and the payments made lower.

Ultimately, however, you may be able to take them to Court and enforce the debt that is owed, but again you must be realistic. Taking someone to Court can be complicated and stressful and will cost you more money to get the court order and recover the debt. If the person who owes you the money doesn’t have money to repay you, you may be throwing good money after bad. Again, you’re also going to have to be prepared to evidence the debt that is owed to you, so you will need to be able to show you loaned the person the money in the first place.

In the final, analysis, you may have to accept you will need to write the money off, and accept it is not recoverable. Whether that means you must write off the relationship, is for you to decide, but it may be that with the money you spent you have bought a life free of a person that was never your friend in the first place.

That may be a price worth paying.  

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