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What to do when a relative hasn't paid you back

November 15, 2011

By Lynnette Khalfani-Cox | Money Rates Columnist

This is the first installment in the Money Talks series, which offers tips and advice for individuals facing various sensitive financial conversations with loved ones. 

Perhaps you're dreading it already: a family get-together where you know you'll run into the relative who owes you money and hasn't bothered to repay the loan. Maybe he or she swore to repay, only to flake numerous times. Or maybe the borrower hasn't even bothered to mention it, almost like the loan never happened.

If you don't want to make a big scene, but you can't just ignore the hole in your savings account, what should you do?

In an ideal world, mature adults would talk rationally about such money matters, well before they reach a potential breaking point. In the real world, people renege on loan agreements all the time, and subsequent financial conversations can devolve into arguments and misunderstandings. The result is hurt feelings, regrets over financial decisions or situations where people either fumble for the right words or silently fume.

If you're faced with the situation of dealing with an unpaid family loan, the best approach is to handle the matter in a direct, tactful and gracious way. How do you do that?

The in-person approach

To broach the matter of a loan that hasn't been repaid, discreetly pull the person who borrowed the money to a quiet place, and simply tell him or her that you'd like to discuss a realistic loan repayment schedule.

Jim Heitman, a certified financial planner and the owner of Compass Financial Planning, says your approach should be amicable and straightforward, not hostile or accusatory.

What's effective

Pick the right time to address the loan. Don't bring up the fact that you're owed money by a relative over Thanksgiving turkey or as everyone is opening holiday gifts.

Raise the issue in private with only the individual in question, not amid a roomful of family and friends enjoying a holiday football game on TV.

If it was a large loan, to raise the likelihood of repayment, suggest that the borrower repay in installments instead of a lump sum. But for smaller amounts, a lump-sum repayment is the best way to quickly and cleanly deal with the situation and put the loan behind you both.

What to avoid

Don't lecture the person or presume to know the borrower's complete economic circumstances or spending habits, advises Heitman. Inflammatory comments will only serve to escalate an already tense or uncomfortable scenario.

Many adults who have borrowed money from relatives already feel bad about having to seek financial assistance from family members. So don't compound their guilt and don't complicate broader family relationships by threatening to divulge their delinquency to other relatives. Such tactics may backfire, leaving you with more than the loss of just money.

An alternative: the written note

Another way to handle this tricky situation, Heitman suggests, is to not have a verbal conversation about the overdue loan at all. Instead, try slipping the person a politely worded but direct note, which may have more impact.

What should the note say?

Heitman recommends something to this effect: "I don't know all the details of your financial situation. But I do know my own economic situation, and I'm at a point where I could really use that money I loaned you, or at least some portion of it. So if you can repay it sometime soon, that would be great."

The key is to keep the note brief, respectful and matter-of-fact.

If the person doesn't respond favorably, or doesn't at least propose a repayment plan, "ultimately, you may be forced to make a decision about what is more important to you: the relationship with your family member or getting paid back," Heitman says.

Before making a family loan

Some of the anguish over a soured family loan might be avoided, Heitman notes, by setting your expectations upfront.

"One of my first rules for my clients is: 'Assume when you loan money to family that you will never see it again,'" says Heitman.

Heitman says it's not that all relatives are irresponsible or callous toward family loans. But there's simply too much risk in today's uncertain economy and too many individual variables that may make repayment of a personal loan highly doubtful.

Don't let money issues fester

While you want to exercise discretion, don't feel that you have to keep quiet about the matter in the name of keeping the peace.

Chris Smith, a personal finance expert and author of the forthcoming book, "Securing Your Financial Future," says that "even though the main purpose of having relatives get together over the holidays is to renew and refresh family ties, there's a real benefit to having money conversations as well."

Even for sensitive topics, Smith says, "I'm a strong advocate of having those kinds of conversations every time you have a chance."

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