I have a friend who just asked me for $5,800 because he’s in arrears on his mortgage and they’re planning on doing a sheriff sale. So I was thinking about loaning him the money, because he’s been a good friend of mine and I hate to see him lose his home, as he has no savings.
He is legally separated from his wife. They wrote up a separation agreement declaring that the house that he was buying was his and the house that they had owned jointly was hers. She sold her house and bought another. Somehow, on his mortgage, it still has her name.
If I loan him money, I wouldn’t be able to place a lien against his property if it has her name on it, correct? I previously loaned a friend $7,000, and she later died. What would be my recourse if this friend failed to pay back the loan or if he died?
The Friend
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Dear Friend,
You are looking for trouble.
If you are flabbergasted, you have your answer. Loaning money to friends, wondering whether a $5,000 loan would enable you to put a lien on a friend’s house to get your money back, a lost $7,000 to another friend who sadly passed away: Listen up, Friend, life is hard enough as it is. Bad things — debt, death, taxes — happen. They will come and find you when they’re good and ready. In the meantime, enjoy the good times, smell the roses and enjoy a simple, uncomplicated life. That does not include lending more money to friends than you can afford to lose.
If your friend is at risk of losing his home, that’s a sad turn of events. We might all wish to help, and each case should be judged on its own merits. But from what you say, it does not sound like $5,800 will solve his problems in the long term — and your comment about whether you could put a lien on his home suggests that you are not the best of friends, in any event. You should only loan money that you are surreptitiously giving as a gift. You won’t see this money again.
A messy divorce
Your friend has gone through a messy divorce. If his former spouse’s name is on the mortgage but not on the deed to his home, she’s in a bad spot. She’s still responsible for the mortgage and, if your friend defaulted on the loan, she would be liable, and her credit score would take a serious hit. But short of sending his ex-spouse a postcard to alert her to the potential legal and financial jeopardy, I’m not sure you can help. Don’t get involved in another couple’s problems.
About two-thirds of people who have loaned money say it was never returned, according to a survey of 3,000 adults by CouponCodesPro. They were owed an average of $522 each, which puts your generosity and, perhaps, your naiveté into perspective. Ex-partners were tapped most often. Most alarming: 60% of people who borrowed money from friends said they do so a couple of times a year, and 27% said they asked for loans in most months. You may be one of many to be tapped for a loan by this particular friend.
Writing off a bad debt
And now a warning: Lenders who are left with a bad debt are generally only able to write off part of the loan that was documented in a loan agreement. A legal loan agreement should include all of the terms and interest rates, how the loan will be repaid and by what date. It should also be witnessed and notarized, which would help if there was a legal dispute. The Internal Revenue Service puts a limit on such capital losses at $3,000 a year.
For an undocumented loan, you would need to get a written statement from your friend to acknowledge the bad debt, so you could at least show proof; a check or a signed receipt would also help. The IRS typically considers money given to immediate family members to be a gift rather than a loan. You would have to show that the loan to your friend wasn’t a gift — that is, there was no expectation that it would go unpaid — and stipulate your relationship to the third party.
You have been warned.
Related: My wife asked for a divorce after 21 years. She wants to buy a house with our savings, but promises to help pay my mortgage.
You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com, and follow Quentin Fottrell on X, the platform formerly known as Twitter.
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