$65,000 cash advance for friend goes unpaid

When loaning money, weigh your own financial situation first

By Todd Ossenfort

The Credit Guy

The Credit Guy, Todd Ossenfort, is a credit expert and answers readers' questions about credit, counseling and debt issues. Ask a question 'The Credit Guy' archives

Dear Mike,
Going back in time is not an option, but I'm sure you genuinely wish you could. It is very common to want to help another person any way that you can and often that assistance is somehow financially related. However, loaning someone $65,000 that you have to borrow to obtain is way, way above and beyond the call of duty to a friend or anyone else. My motto has always been "Friends don't lend money to friends if they plan on staying friends."

Please indulge me in a quick financial sermon for you and my readers and then we'll get on with how best to get you out of this ugly predicament. When it comes to helping someone out financially, a good rule of thumb is to consider whether or not the assistance would immediately or in the future cause havoc with your own personal finances. If the answer is yes, the answer should be no -- period. End of story. Keep in mind that any money loaned should be considered a gift when deciding if your own personal finances will be affected.

You mention your high mortgage in your question. I want to go on record that you should always make your mortgage payment before paying an unsecured debt such as a credit card balance should you not have enough money to cover both. On the other hand, I'm sure you would like to resolve the issue of your $65,000 balance with the least amount of damage to your credit history, so let's see what we can do to accomplish just that.

I would begin by contacting your local bank or credit union. Get an appointment with a loan officer and explain your situation. Depending on your credit score, a local loan officer might be able to do some creative financing with the unsecured $65,000 debt.

If that doesn't work, communicate with your creditor and request that the interest rate be decreased on your balance. Cash advance interest rates are typically much higher than purchase rates on credit cards. Ask if they would be willing to lower the interest rate to the purchase rate. Lowering your interest rate just might make enough of a difference in your monthly payment that you will be able to afford to pay it off. If you creditor is not cooperative, you might consider visiting with a qualified credit counseling group for assistance.

Should a lowered interest rate not be enough to allow you to afford payments, settling the account may be an option, but your credit history will take a significant hit if you take this route. Generally speaking, a creditor will only consider settling an account when it is seriously past due, more than 120 days late. In addition, any amount forgiven on the debt is considered income by the IRS and you will owe taxes on that amount.

One last thought, contact your friend and be honest about the strain the loan you provided is having on your finances. Request that he pay you reasonable monthly payments to help you make your payments.

Take care of your credit!

See related: Negotiate debt payment plans before disaster strikes, 6 credit terms you can negotiate and change, Creditors become less willing to negotiate

Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.

The Credit Guy answers a question about a debt or credit issue from a CreditCards.com reader each week. Send your question to The Credit Guy.

Published: January 26, 2009

	Three most recent The Credit Guy stories: The Credit Guy's top 5 money tips – After writing his column for the past three years, columnist Todd Ossenfort leaves his readers with these top five financial lessons ... Can collectors come after your inheritance? – Public records are perused by debt collectors. If they find out you've inherited a chunk of cash, don't be surprised if they come out of the woodwork ... Neglecting one credit card bill can ruin your credit – A reader has four credit cards, but only wants to pay on three of them. He wonders what will happen if he follows through ...

	CreditCards.com's newsletter Did you like this story? Then sign up for CreditCards.com’s weekly e-newsletter for the latest news, advice, articles and tips. It's FREE. Once a week you will receive the top credit card industry news in your inbox. Sign up now!