Should I loan money to my bankrupt son?

Recently on our legal forum a user asked, “My son filed bankruptcy last year. Even though most of his debts were discharged he’s still struggling to pay his rent and buy groceries. He asked me for a $5,000 loan. I am wondering if it’s a good idea to loan money to him. I am afraid it could ruin our relationship, and I would forever be scrutinizing the way he spends his money. I am also afraid he would not pay me back. What are your thoughts?”

Overview for loaning money to a family member

Whether or not to loan money to your son is a tough decision. Polonius in William Shakespeare’s play Hamlet counseled his son “Neither a borrower nor a lender be. For loan oft loses both itself and friend.”

So while Shakespeare might be against loaning money, never lending money to anyone, however, may not be realistic. With that in mine, let’s take a look at a few common sense steps and considerations before you loan money.

Before you loan money take the following steps:

  1. Loan money only if you can afford to lose it.

Maybe you have millions of dollars and loaning $5,000 to you son is no big deal. But if that’s not the case, experts suggest that you should only loan money to a family member if you can afford the lose it. In fact, for your peace and for the security of the relationship it might be better to view the loan as a gift rather than a loan.

  1. Never co-sign a loan or a credit card application.

It’s one thing if your son never pays back the $5,000. It’s an entirely different matter if they take out a loan, you co-sign on the loan, and then they fail to repay the loan balance, potentially putting you on the hook for repayment of the entire loan. Or worse, damaging your credit rating on your credit report when you cannot repay the loan.

  1. Consider how other siblings will view the transaction.

Although life is not fair and parents can never treat children exactly the same, loaning or giving a large amount of money to one child and neglecting other children is likely to sour sibling relationships and make the other children feel like you are favoring one child. With this in mind, consider how the loan may affect your other children.

  1. Get the details of the transaction in writing.

If you want to loan money and you can’t make it a gift make sure to get the terms of the loan in writing. Find out how they will spend the money. Eliminate any misunderstanding about when and how the loan will be repaid. Make it clear that the money you give to your son should be spend only on necessities.

It may also be a good idea to charge interest. Not only will this make it clear that you expect repayment, you can make sure your loan is generating a bit of profit for you- just like a bank would.

Bottom Line:

Now more than ever Americans are asking family members and friends for loans.  If you decide to loan money to your son and you do not want to simply gift it, you need to treat it like a business deal. Do not become emotional, but instead, clearly outline the loan repayment terms.

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Beth

Beth L. is a content writer for Better Bankruptcy. Good content and information is one of many methods we utilize to bring you the answers you need.