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How to Bail Out Family Members Without Going Broke

by Neal Frankle

How do you deal with a family member who time after time finds himself in a financial sink hole?

How do you best help? Is it as simple as writing a check?

It’s a bit more complicated than that and you can take a few important steps to help your family and safeguard your finances at the same time.

Giving financial assistance to family members

Here are a few steps I recommend:

1. Don’t put your head in the sand.

People don’t wake up stupid and they usually don’t wake up broke. You can see the signs of bad financial behavior years (and sometimes decades) before a crisis. Don’t wait until this person comes to you for money.

When you see someone you care about making dumb financial moves, understand that you may be the one left holding the bag. Don’t think the problem is going to disappear all by itself. If this person is on the road to self-destruction, it might be just a matter of time before that trouble lands on your doorstep.

This happened to a client of mine, Pam. Her son had great ideas – but somehow he was never able to get it together. Time and time again, Ron came to his mother to “invest” in his doomed projects. I showed Pam that she simply could not afford to continue doing that – regardless of what that meant to her son. That leads us to the next step.

2. Know your limitations

Even before anyone asks you for money, be realistic when you see trouble on the horizon. Get ready.

Don’t fool yourself into thinking that you’re going to get back whatever money you loan this person. He or she has already demonstrated financial irresponsibility and it would be silly to expect that somehow this person is going to magically get it together. Personal debt collection is ugly – especially if it’s your brother-in-law you’re trying to collect from.

If you do provide support, remember that this personal loan is a one-way gift. It’s money you’re NOT going to see again. Regardless of the promises you’ll get (and you will get plenty) don’t kid yourself. This money isn’t coming back to you. The obvious conclusion is to only give money that you can live without ever seeing again.

3. Set boundaries quickly, gently but clearly.

If you are the designated “Mr or Mrs Moneybags” in the family, you’re this person’s ace in the hole. Their meal ticket.

Time to cancel dinner.

Again, you don’t have to wait for this person to come to you with their hands out. The sooner you communicate the better.

Let them know what you see and how you feel. Don’t judge. But let them know what you are willing to do to help and what you are unwilling to do. That support should include talking things out in addition to any financial support. You might give this person the gift of personal responsibility by saying no which is invaluable but……

3. Don’t expect gratitude

If anything, you might get indignation. You are doing this person a huge favor by setting boundaries and by forcing them to start accepting responsibility for their financial behaviors. But they may not see it that way.

4. Know That Your “NO” Isn’t Going To Be The End Of The World

You cutting someone else off financially probably isn’t going to end with them being homeless. They may see it as the end of the world but it ain’t. Don’t fall into the guilt trip they will try to send you on.

Let’s use a worst-case scenario and say this person is forced into bankruptcy. It’s bad…but it’s not cancer. And you didn’t do it to them…they did. And did you know that you can declare bankruptcy and still hold on to your home? Don’t tell yourself you’re forcing them out on the street because you aren’t.

Have you ever been in a situation like this? How did you handle it? What was the outcome? Are you still on this person’s Christmas list?


Published or updated March 14, 2011.
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{ 12 comments… read them below or add one }

1 KCLau

It is really a pain to ask money back from family members.
Setting a limit is a good start. I think it is best to have the borrower to sign a commitment letter.

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2 Money Reasons

I’ve been lucky with my family, but I have friends that have gone through some rough times with the siblings…

Nice article Neal!

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3 Neal@pilgrim

Thanks……

I gave money to a relative once….never again. I don’t care if they call me “Pilgrim Scrooge” It’s a badge of honor!

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4 K.C.

It depends on the situation, of course. We fronted $5000 to my daughter and son-in-law when a credit union stopped payment on an official check that was proceeds of a car sale. They paid it back several years later after winning the lawsuit. But they resented having to pay it back.

I have helped my son out a couple of times. I let him know after the second time that there would be no more money forthcoming. He hit bottom, filed for bankruptcy, then got his act together. He still has a way to go, but he is a hard worker and will get there.

In the end, they need to figure it out. That is usually a painful process which is often prolonged when well-meaning friends and relatives try to help out.

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5 MP

Yes, just last week, a relative asked me for a few thousand dollars to pay off a credit card balance. Over the past few months, I have been sending her links to PF blog post, trying to help her get her act together. I told her that she needs to create a budget. So when she asked me for a loan, I asked for the budget she supposedly created, and a copy of the credit card bill. When she told me that she needed payment now, and would produce the documents later, I said no.

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6 Ryan

MP, I’m sure that was a difficult situation to be in, but it was probably for the best.

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7 basicmoneytips

This is a very touchy subject for sure. In most cases, your family may be coming to you because they already have bad credit and know their options are running out.

While there is no magic bullet, this article does make some good suggestions in dealing with the issue. Obviously the message is don’t do it, but there are different situations and you need to be your own judge. At a minimum I would make sure you are okay with with the fact that you probably will not see this money again. If you can come to terms with that than so be it.

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8 Jenna

I can not afford my family. For the past 28 years they have swindled me out of all of my retirement and even some of the income I needed to feed and cloth myself.
My new rule is simple. The answer is NO.

If they truly need anything they can take up my offer to sleep on my flour or sofa.

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9 Smarter Spend

I always lend money to people knowing that I might not get it back; always lend whatever you can afford to lose. remember, its a big gamble.

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10 wiser now

I don’t sweat an occasional $20 that is paid back, but for anything over that, for repeat requests, or for someone who hasn’t repaid a small amount, I look over the transactions more carefully. I learned long ago that if you loan large amounts to friends or family, you should treat them as official loans with paperwork or as gifts. What happens more often, though, is that I offer to employ the person or purchase something that they have to sell that I need. (Caveat on the last part – I only purchase something if I truly NEED it.)

I have one friend who, when borrowing small amounts, fastidiously pays them back. However, when that person borrows a large amount, the payments start off on time and in full and then start lagging and then stop altogether. It does not bother this person to see and talk to the loaner in the course of daily life, and it doesn’t bother them to not pay the loaner off completely. After watching this friend (who has good qualities – financial management is just not one of them), I learned to only offer employment as a means of getting money. Fortunately, I was never one of their loaners :)

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11 Joe Plemon

My wife and I have a policy that we don’t loan money to anyone. We might GIVE them money if we think they are doing their best and the need is real. A loan, especially when you don’t expect to get it repaid, only sets up an awkward relationship. The one who makes the loan starts to scrutinize why the borrower bought that new outfit, or took that trip, or etc, etc.

We would rather simply give the money and keep the relationship clean. So far that has worked for us.

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12 Fed Up in AZ

I have friends who pay back when they can and usually if I have a chore or errand I can’t run, we’ll make a deal. Unfortunately, I have a mooch of a brother I have loaned over $5k to aid his family and keep him out of jail. I am a complete naive. No more. I know I won’t see my nephew and nieces ever again unless they want to see me.

He’s promised repeatedly to pay back, even the small amount I set up each month. Not happening. Now he has to file for bankruptcy and can’t afford the fee and CALLED for help. Screw it. Let his dead beat, lazy, “wife” help him. I will buy medicine, school supplies, winter clothing and food. No direct money is going to them anymore.

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