What to do if friends or family don't pay you back

Most of the money we lend to friends and family is never repaid: what can you do?

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akward conversations about money

We lose out on a jaw-dropping £1.37 billon each year because we loan money to friends and family, and they never repay it - that's an astonishing 57% of everything we lend to them that is lost forever. Bad debts between friends and family can cause enormous problems, so what can you do if you've lent money out and it hasn't come back?

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The researchers at social payment app Circle spoke to Psychologist Amanda Hills about why we have such a problem with unpaid debts, and she said that the root of the issue can be as simple as the fact we're all far too polite to bring up the subject of a bad debt.

Most of us cannot afford to be writing money off like this, however, so there are five steps worth taking if you lend money to someone and it doesn't come back.

1. Mention it.
Hills says communication is key, so before it has a chance to go on for too long and become awkward, remind your friend that the cash is still outstanding. You don't have to accuse them of anything, or complain, just be clear and non-judgmental. If they put you off, then casually give them a time frame for when you will ask again. Something like: "Don't worry, you can pay me in a couple of weeks."

2. Remind them
You'd be surprised how often the root of the problem is simple forgetfulness, so once your casual deadline is up, remind them. If they are simply forgetting, you can suggest an easy way for them to pay - whether that's through an app or online banking. If they get defensive, and indicate that it's not just poor memory getting in the way of repayment, then you will need to try another tack.

3. Write it off
At this point, you need to decide how much it matters to you to have the cash returned. If it's a small sum of money that you can afford to part with, and it risks causing bad feeling between you, then it may be a good idea to write it off. This needs to be something you can easily do, without ill-feeling, or you're no better off.

4. Start a serious conversation
If you cannot afford to write the cash off, then you need to have a conversation about money. Don't bring blame or bad feeling into the discussion. You need to get an understanding of why they cannot pay you back, and then move towards a solution. Could they for example, pay you back in installments? Can they get a more formal loan in order to repay you? At this stage, it's a good idea to make a note of everything you have agreed, so you can come back to it later if you need to.

5. Take legal steps
If you genuinely cannot afford to lose the cash, and they are refusing to pay you back, then you may have no alternative other than to take legal action. You should be able to use the small claims court, which is an affordable process that doesn't require lawyers - although you will need to prepare any documents and evidence of the loan that you have.

Once you get to stage five - or in some cases stage four - then your relationship will be changed forever. The bad feeling around the issue can come between friends and family, and when things end up in court, there's a real risk they can never be repaired. That's why stage three is so important - because you need to make a decision whether the cash is important enough to risk damaging a friendship over.

Before you start

Ideally, of course, there will be an additional step before any of these ones. Right at the beginning, before you hand over any cash, you will ideally have thought through the consequences. If anyone asks you to lend them money, you need to think about whether they can be trusted to pay you back, whether you can afford to write the money off, and whether you are prepared to risk the friendship in order to pursue the cash.

It's easy to feel like we always have to say yes if someone asks to borrow money - or we risk losing a friend. However, if you lend money you cannot afford to lose, and it's never paid back, then there's every chance the friendship is over anyway.

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