After 13 years in the credit management and investigations field, I have found that there are certain financial levels that are dependent on the debtor’s relationship with the creditor. I often hear from creditors, ” I’m sure he will pay. He is a mate”, or “I never expected this from her, seeing as we are family” then, when I see the amount, it will generally fall into a familiar range.
I have observed that otherwise seemingly honest debtors will be willing to sacrifice a friendship for no less than $2500 and a familial relationship for no less than $10,000. What makes these deceptions easier and the event more frequent as well as harder to remedy is that the closer the relationship, the less likely the parties are to have a binding written agreement between them, even in cases of one party personally guaranteeing a loan for the other from an institutional lender (usually auto loans), in this case, the lender normally has a rock solid agreement that binds the guarantor to the debt but in cases that there is no agreement between the principal debtor and the guarantor the cost and difficulty of resolving the debt are multiplied.
The lack of documentation also serves another negative purpose, it removes the right to register a legally valid credit default that will impact the debtor’s ability to access lending in the future, which makes friends and family lending more likely, perpetuating the cycle. The only way to enforce these unwritten agreements and be able to default list is to obtain a legal judgement (often at the creditor’s cost), this is all well and good, but if you consider that the debtor has already ignored their obligations to a party that they have an outside relationship with how likely are they to comply with a faceless organisation or a legal administrative office?
What private lenders must remember is that familiarity does not always equal importance in the debtor’s mind, and the closer the relationship often, the more likely the lender is to “write off” the debt in deference to the relationship. Also, there is death to consider, undocumented loans are often the subject of estate litigation, if any readers have been involved in such litigation in their lives, they will know that this often spells the end of any retrievable relationship. In my experience, success in such litigation is significantly compromised if the debtor claims that the “loan” was indeed a “gift” the unwritten intentions of those who have passed away are, in my experience, impossible to prove beyond a doubt.
A somewhat tricky or uncomfortable conversation at the start of a loan will always be easier to handle while both parties are on good terms and the debtor is more interested in getting the funds than being offended by a piece of paper. And as I always say, if they won’t sign, they won’t pay.