By Catherine Hyde, Paralegal
There is an old adage that says “Never Loan Money to your Family or Friends”. Something you should try to remember but sometimes you just can’t say no and you decide to loan some money. Maybe the shoe is on the other foot and you have convinced one of your friends or family to loan you money. How can each of you protect your interests?
It is all too easy to give money to a friend and say “I know you will pay me back”. But what happens when something goes wrong in the friendship and you part ways? Without something in writing or proof that you loaned your friend the money, you do not have anything to substantiate that in fact you loaned him the money. It is your word against theirs.
To protect yourself, you should prepare a document (can be handwritten) setting out the terms of the loan i.e. the amount loaned, how much the payments are to be, when are the payments to be made, what interest rate, how is interest calculated, are the payments interest only or principal and interest, what will happen in the event of default. If it is a large sum of money you will want to determine if there is collateral to secure the loan. In this event you may wish to seek advice from a lawyer concerning security for your loan, and a more formal loan agreement.
Once the document is prepared, signed and dated by all parties, if possible it should be witnessed by a neutral third party. Both parties should receive a copy of the document.
If you are the lender and the borrower defaults, i.e. does not comply with the terms of the loan arrived at by the two you as stated in the document, you can then seek to enforce the terms of payment. You may wish to seek the advice of a lawyer or paralegal (depending on the amount owed) with respect to what the limitation period is i.e. based on the terms of your document, is there a time limit within which you can pursue payment. If you are within the specified limitation period, the next step may be to write a demand letter for payment. You will need to provide a copy of the agreement relating to the debt, record of any payments which you received, and your calculation of what is owed. If the demand letter does not bring a satisfactory resolution, depending on the amount of monies owed to you, you can then decide to proceed with a claim for payment of the monies. You must factor in the cost of pursuing the claim against the amount of money owed to you.
If you are the borrower and the lender has demanded payment, you need to calculate what you still owe, if anything. Refer to the document signed by both of you as to the terms. Ensure that throughout the loan period you have kept a copy of the cheque to the lender making a payment, or a copy of the bank statement showing the electronic payment and proof of who the payment was made. If it is cash, you will need to get a receipt signed by the lender acknowledging receipt of the payment. Keep all your records and a tally each month as to the balance owing including interest, if any, less the payment. In the event the lender makes a demand for payment, you will have records to verify that in fact you have made the payments and you can clearly prove the amount of money owing. If in fact monies are still owed, you should consider making the payment within a specified time frame. It will then be up to the lender to determine if they wish to pursue the further monies they believe to be owed or accept your calculation of the debt. Once paid, you should have the lender write on your loan document that they have been paid in full.
If you have determined that you do still owe monies but you do not have the funds to make the payment in full immediately, discuss a payment plan with the lender i.e. post-dated cheques with terms in the event of further default.
As always it is best to obtain advice from a paralegal (if the amount of the debt is less than $25,000.00) or a lawyer (particularly if the amount is in excess of $25,000.00) in order to determine what your rights are and how to proceed.
Of course, you could also follow that old adage and not loan the money.