Personal Debt Collection – How to recover debts from friends or family

Have you found yourself in a situation where a relative or friend has borrowed money from you but failed to pay it back? You may be wondering what you can do to collect your debt, and how you can best go about it without harming your relationship. Circumstances where money is lent between friends or family members can often lead to very difficult, emotional situations and unfortunately, can sometimes destroy relationships. So what can be done to recoup your money while attempting to preserve the relationship?

Successful negotiating

Recovering your debt from a friend or relative will likely depend on successful negotiation. How you negotiate will often determine whether or not you are repaid, and whether the relationship is negatively affected in the process. Trying to reach an agreement through negotiation typically takes patience and requires you achieving a balance between demanding your money back and being sympathetic to their situation.

• Stay calm

You are likely to be feeling annoyed and frustrated with your debtor if they have stalled on repaying the amount owed. However, aggression is counter-productive and will only generate more tension. Although the situation may leave you feeling angry, it always helps to remain polite and respectful.

• Ask for an update

An easy way of gently raising the subject of the loan is to ask for an update on the situation for which they borrowed the money.  For example, “How are your car repairs going?”

• Directly bring up the debt

Be firm but straightforward. For example, ask “When do you think you can pay me back the money I lent you?”

• Get to the bottom of the problem

If they appear not to recall the debt, they may simply need reminding. Alternatively, they may provide a legitimate reason why they haven’t yet repaid you. If it turns out they are suffering financial hardship, it might help to come up with a payment plan that is more manageable for them. Changing the amount owed or extending the time frame for repayment may go a long way towards saving your relationship.

• Remind them of your deadline

Remind them of the need to repay your loan and of any penalties for late payment that you may have agreed at the time of providing the loan.

• Explain your need for your money

Add a reason why you need your money back. Sometimes, this encourages the borrower to make payment. For example, say “I really need that money right now, otherwise I can’t pay my energy bill.”

• Send an informal ‘past due’ notice

If verbal discussion proves fruitless, send your debtor a reminder in writing, perhaps by email. Remind them of the circumstances in which they asked for the loan, how you provided it to them, and of their promise to repay. Be specific about amounts and dates agreed to. Sending ‘past due’ notices can help prompt your debtor to pay and portray you as serious about repayment. This also confirms communication and evidence should things progress to legal action.

 

What if they simply refuse to pay?

If you believe they have the funds and are just refusing to pay, your strategy will need to change. It may be that they are now attempting to ignore the agreement, perhaps arguing the loan was actually a gift or investment. If this happens, you’ll need to write a more formal letter of demand.

• Sending a letter of demand

A letter of demand states all details of the debt and includes a warning that you are considering legal action if you are not repaid by a specific date.

In order for a letter of demand to be useful in any potential legal proceedings, it needs to include specific information. It must prove someone owes you the money and that they knew it had to be repaid. This means spelling out amounts, terms, dates and include any substantiating documentation. It also needs to provide a schedule for reaching a settlement proposal and failing settlement, for starting legal action, and you are required to keep proof it was sent by registered mail.

• Enlist the help of a debt collection agency

If you have unsuccessfully tried negotiating yourself, it might be necessary to obtain the help of a professional debt collector. A debt collector will generally have more success than you, and can utilise tools that aren’t widely available to everyone, such as third party sources for information about the debtor.

• Begin court proceedings

Going to court should be a last resort given the costs and time involved, so given this, it essentially depends on the size of the debt. Be aware that in some jurisdictions of Australia, there are time limits for lodging claims to recover debts, so obtaining legal advice is essential. Also, consider whether the amount owed justifies taking legal action, and whether the money means enough to you to threaten the friendship or relationship.

Finally, make sure you protect yourself next time…

The next time you are in a situation where someone you know asks you for a loan, consider creating a promissory note. A promissory note is a legally binding document which records the fact that someone has promised to repay you. It specifies the amount borrowed, any interest you’ll be charging, repayment dates and any other agreed terms. Having a promissory note (or some other form of signed loan agreement) puts you in a far better position should you need to take legal action. If the amount of money involved is substantial, it is always wise to put things in writing.

 

If you are currently having trouble collecting money owed to you, feel free to contact us for a FREE appraisal of your debt.