Protecting your interests when lending money to friends

By Carl Simons

With today's gas prices and crazy housing market, many of us are short on cash. Worse yet is watching our partners, friends, loved ones and those less fortunate struggle with paying bills. Do we simply send them on their way and allow them to turn to high interest lenders, to legalized loan sharks, or do we break down and help them out?

There's a popular saying, "Never lend money to friends," but that's much easier to say than do. However, there is a safe and effective way to protect yourself if you do choose to help someone out. The only truly secure way of lending someone money is to draft a formal note (you can even download this from a few sites on the Internet or have an attorney do it) and have it secured to a piece of the lendee's property. Anything short of that does open you up to some risk. Securing your loan this way will protect you should your lendee later declare bankruptcy.

Many times those close to you are not requesting great sums of money, and this "formal" type of loan may not be necessary as there is little to no risk of the individual declaring bankruptcy. In most cases, it's still best to draft a simple document that states the main facts of the loan. The document would state the names of the parties involved, the date the loan took place, if interest is to be paid, and how and when the loan is to be paid back. The note may also state that in the event that legal action is pursued to recover the monies lent, that the losing party in the legal action will be responsible for the winning party’s legal fees. That note will protect you for up to four years after the due date, should you choose to pursue the individual legally to get your money back. If the loan is for $7,500 or less you can even handle the matter yourself (with a little guidance) in small claims court should your friend choose not to pay you back.

This type of document also may be a bit intrusive for some; but in the long run, if there are problems getting paid back, you will thank yourself. If this is still burdensome on you, the final and minimal option should be to simply write a check for the loan. Whatever you do, if you plan on ever having this amount paid back, do not give cash to the individual. With a cash exchange, if problems arise, it is much more difficult to prove the loan was not a gift.

If you write a check out to the individual and simply write in the note or memo section "Loan to X, to be paid back by Y date," that check in effect becomes evidence of an existing loan. Is it the best possible evidence of a loan? No, but if problems arise in its repayment, you at least have solid written evidence signed by both parties that shows the exact amount lent to the person and will most likely be able to get your money back.

Unfortunately, when we try to help our friends out we do not contemplate that we may have to resort to legal action to get repaid. However, in this case an ounce of prevention is worth a pound of cure.

If you have questions about this or any other legal matter, please do not hesitate to contact my office at (310) 749-4LAW. Additionally, I have posted most of my old articles at www.freelegalinfo4u.blogspot.com.