By John Harlow, Harlow Insolvency
Neither a borrower nor a lender be,
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
Hamlet Act 1, scene 3, 75–77
When all usual sources of finance have been exhausted, people will often turn to family and friends for assistance. It is only natural and is, after all, probably safer than turning to a loan shark or even some so called pay-day lenders. The interest charged by some of the latter may often render the original loan practically impossible to repay.
Close family and friends will often lend without charging interest and more often than not, won’t protect themselves with any written agreement, repayment schedule or security, relying instead on trust.
Without this sort of relationship, the world would be a sadder place, but reliance on trust alone is fraught with danger. Failure to repay can lead to family feuds which are far more stressful and far reaching than normal debtor/creditor disputes. Money issues can cause rifts in family relationships lasting generations.
This essential trust inherent in family relationships and expected within close friendships is what causes the most difficulty if, for whatever reason, the debtor finds himself/herself unable to repay the loan.
As an Insolvency Practitioner (IP), I see these issues arise frequently. In an extreme case, the creditor may of course prove in the debtor’s bankruptcy, although where the relationship is that of a spouse or civil partner, any credit provided to the bankrupt spouse/civil partner will rank behind all other categories of debt.
Problems sometimes arise where a debtor who is facing formal insolvency decides to repay his friend or family member ahead of other creditors. If the debtor has a Bankruptcy Order made against him, the law may presume that this repayment was influenced by a desire to prefer that person and the court may require that creditor to repay that money to the Trustee in Bankruptcy. If a friend or family member had lent money to a company, which then goes into insolvent liquidation, then the same rules apply where there has been a repayment to a connected party.
In all cases, the creditor is required to present a proof of debt to the IP before receiving any distribution from the estate. This can be problematic where there is no written or documentary proof to corroborate the claim and may lead to an otherwise valid claim being rejected for lack of evidence.
For this reason, it is important that any lending between friends and family should be evidenced in writing, preferably with some form of agreed repayment schedule. In certain cases the lender may ask for some form of security over the loan to protect their position. It may feel like a lack of trust by a lender to ask for such at the outset, but it can obviate a lot of problems in the future if for any reason the borrower ends up in financial difficulty.