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Tackling your debts

What to do if you owe money to your family

Posted 22 September 2016 by Christine Walsh

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What to do if you’ve borrowed money from family and now you can’t pay them back.

Dealing with debts can be tricky, especially if you’re having trouble affording everything at the moment. And if you owe the money to a member of your family, this can complicate the situation even further. So how should you handle debts to family? Should you treat them in exactly the same way as other unsecured debts? Let’s have a look at the answers. 

 

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Help – I can’t pay my family back!

If you’ve borrowed from family and you can’t afford to repay them – don’t panic. There are ways to deal with the problem. The first thing you need to do is review your budget and see whether there’s any way that you can cut back on your outgoings. 

Double check to see if you can cut back on your spending on any non-essential items for a while, so you can pay them back. Remember to look at the little things that drain your wallet everyday – sometimes making lots of small cutbacks can end up making you a big saving. 

Although you probably want to pay your relative back as soon as possible, it’s important not to jeopardise really important bills in order to afford their repayments. There are some bills you should always put first because the consequences of missing them are more severe than those with other debts. These bills are your rent or mortgage, utility bills, secured loan repayments, council tax, child maintenance and any court fines. 

What do I do if I can’t make any cutbacks?

You might find that your budget is tight as it is and that you can’t make any cutbacks to your spending. If this is the case, it’s important to be honest and upfront about it to the person that you borrowed the money from. 

If you couldn’t afford another unsecured payment, like a personal loan or credit card, we would advise that you keep the line of communication open with the lender and see whether there’s any arrangement you can come to. Exactly the same applies to family debts. 

You might be worried that they’ll be unhappy you can’t pay them when you said you could but they’ll feel even worse if you don’t pay them with no explanation. 

Explain why you can’t pay them back as planned and try to come up with an alternative plan. Perhaps you can pay them back at a later date or in smaller instalments? Or, see if they are happy with the idea of giving you a break from your payments for a while and then you can resume them as normal at a later date. 

Can I add family debts onto a debt solution?

Sometimes people find themselves in a situation that means they’re just not able to maintain all their repayments. If you have other unsecured debts to repay as well as family members, it might prove to be too much of a strain on your income. 

In some of these cases, the best thing to do is to go on a debt solution – but this will depend entirely on your situation. Debt solutions are plans that allow you to spread the cost of what you owe and, in some cases, write-off part of your unsecured debt. 

On a Debt Management Plan (DMP), you repay all your debts but at a lower, affordable rate. Your payments are worked out based on what you can afford after all your other essential bills have been paid. For example, say you have credit cards, personal loans and store card debts. If you qualified for a DMP, all these debts can be added onto your plan and your debt solution provider will make sure that you can also afford to pay your family debts off as well. 

You’d make one regular payment to your debt solution provider and they send out payments to each of these creditors. The payment each one receives would be on a pro rata basis – which just means that the creditor you owe the most money to gets the highest payment and so on and so forth. 

An Individual Voluntary Arrangement (IVA) is another solution that might be right for you. Your payments are worked out in the same way as we described above but the difference with an IVA is that after you’ve completed the plan successfully, the remainder of your debts are written off. An IVA normally lasts five years, during which time you pay a certain amount towards your unsecured debts. 

It is sometimes possible to include family debts on an IVA – if the debt is due to be paid back then it should be included on the plan. 

There are other debt solutions available and which one is right for you just depends on your circumstances. Make sure you look into them carefully and get expert advice. 

Is borrowing from family ever a good idea?

Despite all this, you still might want to consider getting a loan from a family member. And borrowing from family can work well in some cases – you don’t have to go through a credit check and you’re much less likely to be paying interest than with another lender. 

On the other hand, you do run the risk of damaging a valued relationship if something goes wrong or there’s a misunderstanding. Make sure you tread carefully when it comes to borrowing from a family member if the relationship is already strained. If money has caused arguments in the past, it might be best to steer clear. 

 

Want more information about which debt solution might be right for you? Just get in touch with one of our expert advisors on 0161 605 4810, or click ‘find my solution’ above to see what your options are. 

by Christine Walsh

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.