Recovering Money: Strategies for Unpaid Personal Loans

Loaning money to friends and family places the relationship at risk if the loan isn't paid back as agreed. If polite and persistent reminders fail to inspire repayment, you'll have to escalate the situation and use more aggressive collection efforts. Unpalatable as taking legal action may seem, seeking your funds in small-claims court or filing a civil suit may be the only way you'll be able to recover the money.

Be Proactive

Don't let an unpaid loan fester for years. Not only is that straining on a relationship, you risk having the uncollected debt pass the statute of limitations, in which case you won't be able to use the legal system to collect. Statutes of limitations depend on whether the agreement is oral or written, and on your state law.

Get It in Writing

If you've just loaned the money, or are in the process of doing so, document the agreement. State the terms of the loan, including payment details. Sign the document and have it notarized before handing over the funds. This makes it easier to use legal mechanisms to collect if collection problems arise later.

If you didn't sign a written agreement and repayment plan with the borrower when the loan was originally made, you still can get an agreement in writing later. Document the amount of the debt and the repayment schedule, and sign and date the agreement. Have the borrower do so as well.

Send a Demand Letter

When verbal requests for repayment fall on deaf ears, send a demand letter. This should detail the circumstances of the loan agreement, such as the amount borrowed, the balance remaining, the original plan for repayment and any delays. State what your next steps are, such as filing a lawsuit. Send it certified mail with a return receipt requested, to make the seriousness of the request clear and to confirm the letter was received.

Legal Options

Even if you have an oral agreement and there's nothing in writing, it may be enforceable under certain conditions. The terms of the loan must be defined, and the items agreed to must be specific enough to allow for enforcement. "I'll pay you back when I can" likely would be too vague to take legal action.

If small dollar amounts amounts are at stake, it can be handled in small-claims court. You and the defendant each represent yourself and make the case as to whether the loan needs to be repaid or not. Larger amounts will require filing a civil suit, and at that point you may want to consider hiring an attorney to advise you on next steps. In particular, you may need guidance without a written lending agreement, since the specifics of what constitutes an oral contract, and how its conditions are enforced, vary by state.

Tip

If your dispute concerns $5,000 or less, that qualifies for small-claims action in most states.

Collection Action

Even if you win a legal judgement, that doesn't necessarily make it easy to collect. You generally have to collect the award yourself. If a simple request doesn't suffice, you may need to take more aggressive measures, such as securing a garnishment against the person's wages or a lien against his bank account. Liens and garnishments expire after a specified amount of time, but you often can apply to get them renewed if collection hasn't yet taken place.