From time to time my readers contact me with questions. I thought this one was worth sharing with you.
These readers lent money to a friend. You know how I feel about that. If you loan money to a friend there is a chance you won’t get your money back, and you will lose a friendship. If you would really like to help, then give the money as a gift. There will be no hard feelings on your part if the money isn’t repaid, and you will be pleasantly surprised if you get the money back.
Loaning to a friend can be devastating if you don’t have extra money to give away. It’s not that your friend isn’t trustworthy or sincere. Just consider this: if your friend can’t afford to pay a bank loan or rent, then how will he be able to pay you back before you need the money yourself?
It’s difficult to watch a friend drowning in debt or suffering without a car or apartment, but two drowning people are not better than one. There may be better ways to help out than putting yourself at risk.
With that said, this couple did loan their friend a substantial amount of money. They loaned so much money that they took the precaution of having a formal legal transaction, which included a contract and a mortgage lien against the friend’s home as a safeguard. It sounded like they had covered all their bases to protect themselves and assure the repayment of the loan.
What was missed? What happened to the perfect plan? They didn’t consider what would happen if the friend filed for bankruptcy, which happened. Okay, I thought, that’s not good, but there’s still the mortgage lien on the property. Wouldn’t they get some of the lent money back from the home sale? No! Because of the economy, the home is “upside down”. That means that their friend owes more on the mortgage than the home is worth.
In better circumstances, the home sale could have waited for the market to improve. But, with bankruptcy proceedings, the court will probably order the liquidation of all the assets to repay the creditors. If that is done, then the home will be sold at the current market price and everyone will lose. This was a very hard lesson for this couple to learn because they lost both their money and the friendship.
Now can you see why I tell you to give money instead of lending money? This mistake has hurt this family for many years to come. They thought they would be receiving structured payments until their money was repaid. But the money is lost, and it was money they needed themselves. Learn from this experience.
Jill Russo Foster is the author of Cash, Credit, and Your Finances: The Teen Years. She provides practical tips for every day finances. Learn more about protecting your credit and living within your means, with Jill’s popular free reports and bi-monthly ezine, available here ==> CashCreditandYourFinances.com
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