From the Bard himself, in the classic play Hamlet, we learn:
“Neither a borrower nor a lender be,
for loan oft loses both itself and friend.”
While we know better than to borrow money from family, often circumstances require that we break the rules. It may be to help start a small business or to cover the down payment on a car or the first and last in a new apartment; but for whatever the reason, we turn to family for help.
Conversely, we offer that help when needed. However, what are the possible repercussions of lending money to loved ones?
NBC News did a report on lending money and siting a survey conducted by Bankrate. We learn this: (https://www.bankrate.com/finance/credit-cards/lending-money-survey-2019/)
Nearly half (46 percent) of adults who lent money to friends or family reported having a negative outcome, 37 percent said they lost money and 21 percent experienced a damaged relationship with the borrower, according to a recent survey by Bankrate.com.
In addition, “20 percent said their credit score was damaged as a direct result.”
Recently, one of our attorneys at Bankruptcy Advocates had the opportunity to address a situation that involved a co-signed loan. The client had this question:
“I cosigned on an unsecured loan for a family member. They filed for chapter 13 bankruptcy and are currently making payments to their plan. At the moment there is a stay in place and I am not being contacted for any payments. After the chapter 13 discharge will I be liable to pay the remainder of the debt if it wasn’t paid in full through the chapter 13 plan?”
Marcus Herbert responded by saying:
“Yes. The discharge protects only the debtor who filed for relief in bankruptcy. Said another way, the debt is not discharged. Upon successful completion of the bankruptcy case, the debtor’s obligation to pay the debt is discharged. Since your obligation to pay the debt was not wiped out, you will still owe the balance of the debt.”
We offer to help out of the goodness of our hearts; however, we need to be aware that there could be repercussions down the road. Should you still desire to help, here are some things to consider:
- In the Kiplinger article “Smart Ways to Give/Lend Money to Family” we learn: Never lend more money than you can afford to lose. “You hope you are going to get the money back, but you always have to go into a family loan with the notion that you might not see the money again.
- Even if you are loaning money to family, make sure you treat it like a bank loan and put the details of the amount and the repayment schedule in writing. “Use a written loan agreement to keep everybody on the same page and to help ensure that the lender doesn’t walk away empty-handed. Local attorneys and online services can provide template documents that you can complete to get a head start.” (TheBalance.com)
- If you have co-signed a loan, for example a student loan, make sure there is language in the document that offers you the opportunity to be released from the obligation at some point.
In an article from Forbes entitled Is It a Good Idea to Co-Sign a Loan, the author shares this information about being released from the loan:
Other options to get released from the loan include:
- Refinancing. If borrowers refinance the loan on their own, the loan you co-signed will be paid off and you will be released of your obligations.
- Paying off the loan. Once the borrower pays off the loan, your financial ties are gone.
- Selling the property. If the borrower sells the house or car being financed, the loan will be paid off. However, you won’t have a choice in this—it’s up to the borrower to sell.
The bottom line is that you need to do a little bit of research before offering to financially help a family member. The best advice is to contact an attorney who will help review the documents (or create them), will assist with reviewing the situation without emotion and offer suggestions to help protect your credit history.
At Bankruptcy Advocates, we have helped many clients with their financial circumstances. Give us a call first.
Southern Illinois Bankruptcy Attorney law firm Bankruptcy Advocates is located in Carbondale and serves a wide geographic community including Carbondale, Murphysboro, Marion, West Frankfort, Johnston City, Benton, Herrin, DuQuoin, and Pickneyville. We are a debt relief agency. Our southern Illinois bankruptcy attorneys help people file for relief under the Bankruptcy Code. Give us a call at 618-549-9800 or email us at [email protected] to speak about your case or legal matter. Convenient appointment times are available.