How a friendly loan can turn ugly
When repayments stop, you're left on the hook
To Her Credit
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also writes regularly for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Stewart Radio and other programs. See her website SallyHerigstad.com
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Dear To Her Credit,
Two years ago, I applied for a loan to help out a friend to
start a new business. I believed in her product, and she agreed to pay the
money back in installments toward the credit card company. The amount was
The business failed, and the money has been spent. The debt is
now double the original amount because of penalties and interest, and the credit
card company is after me to make the payments because the loan is in my name.
What are my legal options? What could happen if I am not
able to pay the loan back? -- Leah
You loaned a friend $30,000. You don't say where your friend
is now, or whether she is even willing to pay the money back. I'll assume she
is too embarrassed to show her face, and she's left you with the debt.
That's the trouble with lending money to a friend. You
usually lose both the money and the friend. It happens more often than you
think -- and it often seems to be the borrower who breaks off the friendship.
If you can't pay the debt, the credit card company will step
up efforts to make you pay. At first, you just get letters and then possibly a
phone call. As time goes by, the interest rate rises, and your $60,000 debt can
turn into $120,000 or more before you know it.
Your credit is already suffering with this delinquent
account in your name. The credit bureaus don't know or care how you got into
debt. As the reports from this credit card company report longer and longer
overdue times, your credit score will suffer even more.
Eventually, the credit card company will take legal action
against you. It can sue you for nonpayment, seize money in your bank account
and garnish your wages. It's serious business.
With a $60,000 debt you can't pay, you're a prime candidate
for bankruptcy. Before you head to your nearest lawyer's office, however, you
should investigate every possible alternative.
The first place to try to get money is from your friend.
She's probably looking at the $60,000 current balance and thinking she can't
pay it all back, so why try. She borrowed from you because you were in a better
financial position than she was, so maybe she doesn't realize what a difficult
spot she's put you in. Some people (not all) who are perennially in financial
trouble assume that people with stable finances have an unlimited supply of
money. If only it were true!
If you are on speaking terms, talk to her about how she can
pay off this debt. She may have to work a second job, sell her car or move back
in with her parents or take a roommate. Those are all drastic steps, but she
borrowed and spent the money. She should do what it takes to make good on her
debt to you.
Another step you can take is to try to negotiate the debt
with the credit card company. About half the debt is late fees and interest.
Paying back money that has been spent is one thing. Paying $30,000 in interest
and late fees is another. Contrary to the ads you may have seen and heard,
negotiating debt is not easy or automatic. However, in this case, it's worth a
try. See "Credit card debt negotiation in 3 (not) easy steps."
If you cannot get your friend to pay, and the bank does not
negotiate enough to make it possible for you to pay off the debt, I'm afraid you'll
need to consider bankruptcy. As scary as bankruptcy sounds, it's not as scary
as being hounded for a debt that, if ignored, will soon be in the six figures.
Bankruptcy is no walk in the park. It involves paperwork,
meetings and time. You lose some control of your money and your credit score
On the other hand, the bankruptcy courts generally do not
take personal items. Depending on the laws in your state, you probably can keep
all or most of your other assets, including your car. Bankruptcies are public
records, but who sits around reading bankruptcy announcements? Your friends and
relatives don't need to know unless you tell them. (If you do tell them, you'll
be surprised at how many people admit they've been through bankruptcy
themselves!) If you have a steady income, you may be able to file Chapter 13 bankruptcy , which puts you into a payment plan for the next three to five years.
This would be a good time for you to find a nonprofit agency
affiliated with the National Foundation for Credit Counseling
or the Association of Independent Consumer Credit Counseling
Agencies. A credit counselor can look at your total financial picture and help
you make the best decisions.
I only recommend bankruptcy in extreme cases, such as
medical catastrophe, business failure or a debt run up by someone else. You've experienced
two out of three of these events. If you don't take action now, it will only
get worse. If you find help and make some tough decisions, however, you can
take this as a lesson learned and move on.
See related: What to expect when filing for bankruptcy
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