Supporting Your Loved Ones While Protecting Yourself
Before the current public health situation began to impact many of our daily lives, we wrote a blog post about getting money mixed up in romantic relationships. In that post, we mentioned that we would write something more in-depth about making personal loans versus giving gifts. With the coronavirus disrupting so many people’s incomes and financial security, we thought there is no better time to dive into this subject.
This blog post is not intended as a commentary on whether you should make personal loans or give financial gifts to family and friends. That decision is 100% up to you. However, we do want you to be as educated as possible about the ways that we have seen personal loans and gifts go wrong. That way, you can choose to support your loved ones while also protecting yourself.
The Golden Rule: Be Clear about the Difference Between a Gift and a Loan
When making a gift or a loan to a family member or friend, there is one golden rule: it must be clear from the very start whether it is indeed a gift or a loan. If you want to make a financial gift to a loved one, there is a specific legal meaning behind that action. A gift is something you give with absolutely no expectation of anything in return. This includes no expectation of repayment and no expectation that a particular action will be taken. When you make a gift, you no longer have any say in how that money or property is used. If you want to make a loan, or a contingent gift, you can do so, but you will want to do so far more carefully.
In these uncertain times, you may know someone who is struggling financially. If you are in a position to help, you may feel moved to do so. However, it is important that you are clear with yourself and with the other party about whether there are any strings attached to your support. If you expect to be repaid, these terms need to be laid out in clear and specific terms.
Document the Agreement in Writing
It may feel a little unnatural or silly to require your loved one to sign a contract for a loan. However, things don’t necessarily need to be so formal. If you want to financially support a friend or family member, but you expect to be paid back, write it down. You don’t need to have a lawyer draft a formal agreement, but you should handwrite or email the details of the loan and have the recipient sign indicating agreement. This writing will serve two purposes: one is to protect you in the future if the borrower doesn’t follow through, and the second is to make sure that you are both on the same page. In a moment of crisis, it is easy to think that two parties have come to a verbal agreement when, in fact, they are thinking totally different things. Misunderstandings don’t always lead to legal suits, but they do often lead to tension, conflict, and unpleasantness. By writing down the terms of your agreement, you can help avoid confusion.
What do you need to write down? Depending on how formal you wish your agreement to be, writings can range from simple back-of-the-envelope calculations to a formally drafted and signed contract. Here’s what we suggest you include at the very least:
The amount of money being loaned.
The date on which the loan was made and the method of disbursement. For example, $3,000 sent via Venmo on 5/13/20.
An express statement that these funds will be paid back.
A deadline by which funds will be repaid or a proposed repayment agreement. This part is optional, but it is a great way to make sure that all parties are on the same page.
It is always preferable that the recipient of the funds sign and date the agreement. At least some kind of acknowledgement from both parties is a good idea. This can be done via email, text message, or a good old-fashioned signature.
Keep All Records and Communications in One Place
After you have made the loan to your loved one, keep all of your communications about it in one place. For example, if you make the loan via Venmo or PayPal, keep a screenshot of the transaction on your phone, as well as screenshots of any text messages or emails acknowledging receipt of the funds and the intention to repay. As time goes on, any additional communications that acknowledge the loan and the terms of repayment should also be catalogued. Remember, keeping careful records does not mean you don’t trust or love the person to whom you’ve loaned money. Keeping careful records and checking in on a regular basis is simply a way to ensure that both parties remain on the same page and share the same expectations.
If Things Go South, There are Options Available
Although we hate to see it happen, we do occasionally get approached by individuals who want to pursue legal action against a friend or family member who has not followed through on a promise to repay a loan. While we certainly don’t recommend getting a lawyer involved as a first response, we do understand that things change and sometimes an attorney is necessary. At Wakefield Law, we have been practicing collection law for over thirty years. Most often, we represent businesses who are owed funds by clients and customers. However, we do often see personal loans that have gone wrong. In these cases, we follow your lead. Only you know the details of your relationship and your financial agreement, so we take care to pursue all personal debts respectfully, carefully, and zealously.
Empower Yourself to Support Those in Need
By educating yourself about the best way to make a personal loan, you are empowering yourself to support those in need. While we always recommend a clear, careful approach to making personal loans, we also understand that there are times when we need to come together to support those in our communities. If you have any questions or concerns about how to approach a personal loan, feel free to give us a call. Our office number is 703-771-9740, and our email address is law@wakefieldpllc.com.