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What to do when a relative won't pay you back

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brokeThis Money Talks series 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 a family loan, 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 to ask for money or silently fume.

If you're faced with the situation of dealing with a family member who won't pay back your loan, the best approach is to handle the matter in a direct, tactful and gracious way.

How to ask for money from family

To broach the matter of a family member who won't pay back your loan, 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 to asking for money to be paid back should be amicable and straightforward, not hostile or accusatory.

Discuss family loan in-person

Pick the right time to address the loan. Don't bring up the fact that a family member won't pay back your loan 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 increase the likelihood of repayment, suggest that the borrower pay you back 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.

Avoid loan repayment drama

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

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 approach to collecting a family debt

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.

How to ask for money from family in a note?

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 many individual variables that may make repayment of a personal loan highly doubtful.

Don't let family 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, "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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