Debt help when you owe money to friends and family
Friends and Family Debts overview
On the face of it, borrowing from friends and family can appear to be a promising alternative to using mainstream credit companies, with benefits that include little to no interest being charged and the reassurance that they won’t send debt collectors to your door. However owing money to friends and family can lead to incredibly delicate situations and relationships that sour, which in many instances can be more emotionally distressing than dealing with a professional, regulated company.
The advantages of using Friends and Family as a credit solution
- Borrowing from someone you know can provide for far more flexible repayment options, such as a break before needing to make the first repayment.
- The nature of this lending also avoids having to go through a credit application, as well as handling what may be a lot of paperwork and a long application process.
The disadvantages of Friends and Family as a credit solution
- Financial agreements between family and friends can all too often lead to disagreements about what terms were agreed. For this reason, it’s a good idea to set out a detailed contract before forging ahead with any loan from a friend or family member. This should include details of:
- The total amount to be loaned
- Any interest or charges
- What should happen if you can’t make a repayment
- The expected final payment date
- What, if any, the lender is receiving in return (such as a percentage stake in your business venture)
- Not only can missed repayments lead to a difficult relationship (or one that breaks down entirely), you may also find yourself having to answer personal financial questions, such as in relation to your spending habits.
Worried about debts that won't go away?
Debt help tips for tackling debts owed to Friends and Family
- Your first step is to be open and honest. Simply speak with your friend or family member about your situation, and whether they can offer an alternative repayment plan, such as spreading your repayments out over a longer period or providing you with a break of a set period to get back on track. Before this conversation, it may be useful to sit down and work through your finances. A budget sheet can help you understand your income and outgoings, providing you with a dead set figure as to how much you can afford to repay.
- Above all else, do not ignore the person who has lent you money. If you do so, they may be left to presume that you don’t plan on repaying the loan at all.
- If you can’t resolve the issue, your friend or family member is entitled to take you to court (much in the same way as with all other unsecured lenders). In this instance, you should research what debt solutions may be suitable for your circumstances.
An important note on priority debts…
In most instances, debts owed to family and friends should be considered a non-priority debt (so you should pay things such as your rent/mortgage, tax debts and utility debts first). That said, there may be a compelling reason why this form of debt should be considered as a priority. In this instance, you should be ready to explain to your other creditors why this is the case.
IVAs – A potential debt solution for Friend and Family debt
If you’ve found yourself owing money to friends and/or family that you’re unable to pay back, it may be time to face your debts head on.
An Individual Voluntary Arrangement (a form of debt settlement) can drastically improve your financial outlook. Designed for debts above £5,000 that is owed to two or more creditors, an IVA would involve lower repayments that you can afford based on your income and expenditure.