We’ve all heard stories about people lending large sums of money to family or friends without any formal agreements in place. Alarm bells ring as the story starts and we know it isn’t going to end well. No matter how often these stories are told, people naturally can’t imagine the possibility that the other person might never repay them. But, sadly, it happens too often and if it does, relationships can be damaged and often money lost. So how can you help family or friends financially without ruining the relationship?
Here are some things to consider.
Informal Loans and Repayments
Have an agreed repayment date. If a loan agreement (whether oral or written) does not stipulate a date for the debt to be repaid, or you both agree that the loan can be repayable “on demand” then the right to sue for repayment (called the ‘the cause of action’) will usually be considered the same as the date that the money was initially lent to the other person. The ‘cause of action’ date is important because this is the date from which your right to sue to recover the debt begins. This means that when a repayment is agreed to be repaid on demand, the borrower accepts that they are ready to repay the loan at any time.
Limitation Periods for Repayment
The above rule might seem unimportant, but it can have serious consequences for a lender if you want to recover the debt. The Limitation Act 1969 (NSW) makes it clear that, as a lender, you only have 6 years from the date the cause of action arises to sue for an unpaid debt.
Therefore, if you and the borrower have not agreed on a date for repayment at the time the loan is given or have agreed that the loan is repayable on demand, then you could be unable to enforce repayment after 6 years from the date the loan is given. This is even more likely to be the case if the person who borrowed your money hasn’t made any payment on the loan or acknowledged the loan in writing since you provided it to them.
What You Should Do
Remedy the situation as fast as possible:
If you have already lent the money and you think that you are nearing the end of the 6 year period, and the debtor has not repaid the debt and they are unlikely to, then you need to take steps to secure your rights over the loan and make sure you are not left empty handed after 6 years.
The limitation period may be restarted if the borrower makes a payment towards the loan, or acknowledges the loan. The acknowledgment must be in writing, it must clearly acknowledge the existence of the debt, it must state that the debt remains unpaid and it must be signed by the debtor. As there are strict requirements for what constitutes an enforceable acknowledgment of debt, it is advisable to discuss the matter with a lawyer first before you approach the debtor on your own.
Prevent these situations from arising:
Obviously, the best way to avoid situations like the ones above from arising is to have a loan agreement in writing which states the details of the debt owed and when it is to be repaid.
Although an oral agreement can technically be enforced (although this can be difficult), it might not always guarantee the loan is enforceable. The benefit of a written loan agreement drafted by a lawyer is that the lawyer will take into account what you are trying to achieve and ensure that the actual loan agreement meets your needs.
Seek Legal Advice
Lending money to family and friends with no written agreement can be problematic when repayments are not being made. If you would like further information regarding recovering loans or if you have any general legal enquiries, please do not hesitate to contact one of our experienced solicitors on 9963 9800 for a confidential discussion or via our contact form.