How to you get good friends to honor a debt?
- Email icon
- Facebook icon
- Twitter icon
- Linkedin icon
- Flipboard icon
My wife made a couple of loans to friends roughly 10 years ago. They were having trouble making ends meet. I was not in favor of loaning money to friends, but my wife felt that the situation warranted it. The total of the agreed loans was around $15,000, not including the accrued interest at an agreed-upon 5% rate. I think that about $3,500 has been paid back on the loan with interest.
Things have stabilized for the friends and they’ve gotten back on their feet, but paying back the loans will still be a challenge for them. They have worked to make some payments, but we have never had a consistent payment and have not pushed on the issue for about four years. My wife did get a notarized loan note associated with the first loan, but not the second.
She is more willing to consider this a bad debt to write off than I am, but I also realize that their challenge to repay will be far greater than our need for the money. I believe that they should make a reasonable effort to make payment on the principal, and we would consider the remainder as bad debt and put this behind us. I would love to conclude this before the end of this year, one way or another.
My questions are: How would you recommend approaching them (and my wife) on the issue in order to come to resolution? I am willing to forego the interest, but I think that it 
is more than fair to expect repayment of principal. Assuming that some of the loan will be written off as bad debt, what do I need to do to document a bad debt write-off on my taxes?
The first rule of loaning money to friends: Don’t do it. The second: If you do, don’t loan what you can’t afford to lose. The third: The relationship will rarely, if ever, be the same.
Before you loan money to a friend, know this: Whether you lend $5 or $15,000, you may never see it again. About two-thirds of people who lend money never see it again, according to a survey of nearly 3,000 adults released by CouponCodesPro last year. They owed an average of $522 each, which puts your and your wife’s generosity into perspective. What’s most alarming about that particular study: 60% of those said they borrow money a couple of times a year and 27% said they hit friends and family up for money most months.
None of that helps you now, of course. You should make an effort to recoup the remainder of the loan – $11,500 – and forget about the interest. There are plenty of people who scrimp and save without resorting to borrowing from friends, so I am inclined to think that those who do borrow have a particularly hardy disposition or, to put it bluntly, have a sense of entitlement. Say you need the money back (no reason necessary), give a deadline and follow up with the details by registered post.
“ If you really want this money back from once beloved friends, you cannot treat them as high school friends or former neighbors or even a second-cousin once removed. You need to treat them like customers. ”
Quentin Fottrell
They need to live in the real world and, to quote the MTV reality show of the same name, find out what happens when people stop being polite and start getting real. If you really want this money back from once beloved friends, you cannot treat them as high school friends or former neighbors or even a second-cousin once removed. You need to treat them like customers. By not making any real effort to return the money, they have put a price on your friendship of $15,000. The only thing standing between you and the $11,500 they owe you is the illusion of that friendship.
For the tax write-off, I asked for some expert advice, and so should you. You may be able to write off part of the loan that was documented in a loan agreement or, in an ideal scenario, one that was drafted by an attorney, says Gary Marriage Jr., chief executive of Nature Coast Financial, an independent insurance and financial services firm in Crystal River, Fla. “It would need to state all of the terms and interest rates, and how the loan would be paid and when it needs to be paid off,” he says. “It helps if the loan agreement is also witnessed and notarized.” However, the Internal Revenue Service puts a limit on such capital losses of $3,000 a year.
It’s more complicated when it comes to dealing with the loan that wasn’t documented. You would need to get some kind of written statement from the third party to acknowledge the bad debt, so you could at least show proof; a check or receipt would also help. This is more complicated and may require advice from a financial planner or attorney. The IRS typically considers gifts to immediate family members as gifts rather than loans and you must show that the loan to your friend wasn’t a gift – that is, there was no expectation that it wouldn’t go unpaid – and stipulate your relationship to the third party.
Your best bet, therefore, is to try to get them to pay as much of the loan as possible before going down that road. If you do, you need to change your tactic. No more good cop, ambivalent cop. You both need to get tough. They have shown you that the more wiggle room you give them, the more they wiggle. Tell your wife that writing it off as a bad debt won’t save the friendship, and it can’t function with this loan hanging over it. You have one choice: You need to risk losing the friendship in order to save it – and get your money back. Give yourself and your friends a deadline of six months or less to do just that.
Do you have questions about inheritance, tipping, weddings, family feuds, friends or any tricky issues relating to manners and money? Send them to MarketWatch’s Moneyologist and please include the state where you live (no full names will be used).
Would you like to sign up to an email alert when a new Moneyologist column has been published? If so, click on this link.