Your cousin has been having financial troubles and has reached out to you for a lump sum of money to ease the burden. He said he'd pay you back when he is able to. Flash forward three years and his money problems seem to have evaporated but you still haven't seen a cent of the money he was meant to return to you. Is it legal to sue someone, especially someone you have a close relationship with, over unpaid loans?
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Money is something that can drive a wedge between family members and close friends. A lot of people find the topic of money uncomfortable and as such will avoid it at all costs. But when a loved one reaches out for financial help, often times they approach with a sense of desperation and urgency — which makes it difficult to refuse. While they may show gratitude when you hand over the funds they might not be so thankful when you ask them for the money back.
Depending on the amount of money that exchanged hands, you may decide to take up legal action to retrieve the money. But do you have any grounds to sue the borrower? The more pertinent question to ask would be: did you have a signed and dated written loan agreement?
"An agreement to advance money as a loan is a contract between the lender and the borrower. A contract made orally is just as binding as a contract in writing," Slater + Gordon Lawyers senior associate Michael Harris said. "However, it can be difficult to prove the existence of an oral contract. It is likely to be your word against the borrower’s whether the money was a loan or a gift.
"A written agreement signed by the parties will assist the Court in deciding that the money was a loan."
Having a written arrangement will cut out the ambiguity as to whether the money was given to a person as a loan or a gift. You don't need to pay someone back for a gift but you will have to if it's a loan. This might sounds extremely obvious, but in many situations when one party is trying to retrieve money given to a couple, for example, being very clear on whether the amount was a loan or gift really does matter.
In the Penny & Nolan  FCMA court case, a father loaned his son $250,000 to buy a property, which was sold later on. The dad then loaned the son an additional $70,000 to buy a new place. Come time when the son is going through a divorce and the father wanted to recover the money, because there was a loan agreement in place, the Courts decided the loan amount would be recoverable from the shared asset pool that was being divided.
Meanwhile, in the Maddock & Maddock & Anor, another father was seeking a repayment of $240,000, claiming it was a loan. No written agreement was drafted which lead the Court to rule that the money was a gift, not a loan.
So yes, you can take a family member to court over unpaid loans but you better have evidence to show the Courts that it is indeed a loan if you want to win your case.
It is highly recommended that if you do intend to lend money to a family member or close friend that you put together a loan agreement. Don't worry about whether this suggestion would offend the other party. You're offering help and if they are sincere about paying you back the money later down the track then they should have no problem formalising the arrangement. It will avoid potential strife in the future.
According to Harris, it's not difficult drafting up a loan agreement. You just need it to contain the following:
- The amount of the loan (the principal).
- Interest (if to be charged, the rate and how to be paid).
- The term of the loan (when the loan is to be repaid).
- How the loan is to be repaid (lump sum, instalments).
- Method of repayment (cash, direct credit, bank cheque).
- Security for the lender (if the loan is to buy personal property, the lender may be able register an interest on the Australian Government Personal Property Security Register).