Being asked for moneyIf asking someone for money is tough, being asked for money is tougher. The lender stands to lose not only the money but also the relationship, and maybe ancillary relationships in the case of family disputes.
Some people, like Dori Harrell, lend money without planning to get it back.
"My husband and I have occasionally lent money to friends and family, never more than a few hundred dollars, though. And we have a policy we keep between the two of us: We don't loan money, we only give it away," she says.
"We don't tell recipients that, but if we don't get repaid, we don't fret or harass, either," says Harrell.
As a general rule, you shouldn't lend out money that you cannot afford to part with permanently. If your retirement or living status would be adversely affected, decline to lend money, or offer to lend an amount you can comfortably manage.
Far too many people find that out the hard way. Bill Jelen was one of them.
"I loaned $6,000 to a neighbor in May. He needed cash flow for seven days. It seemed safe," says Jelen.
"I still haven't been paid back. It is a general disaster. He now pulls in his garage and closes the garage door before getting out of the car," he says. "This is a felony in Ohio, but I am not sure I would be extremely popular in the neighborhood if I get the guy sent to jail, leaving his wife and mother without an income."
Documentation is key. While it may not help you get your money since you can't squeeze blood from a turnip even if you take the turnip to court, you can at least use it to get a possible deduction on your taxes.
The IRS on loans between friends
"In theory you can take a deduction for a bad debt. It's like a capital loss, so it might be deductible over a long period of time, depending on your overall financial situation," says Adele Brady Bolson, CPA and member of the AICPA's CPA National Financial Literacy Commission.
In general, the capital loss must be claimed for the tax year in which it became worthless. It should be used first to offset capital gains, if any, and after that you can write off up to $3,000 against other income. Whatever you don't use in the current tax year can be carried forward to future years until it's used up, says Bankrate's tax adviser George Saenz.
The IRS doesn't just go around handing out these deductions, however. The taxpayer has to prove that they weren't gifting the money to the borrower, that it was in fact a loan with a bona fide interest rate.
"If you really, really intended it as a loan, then what you want to do is document the heck out of it so there really is no question if you were to be audited that it was a loan," says Bolson.