Traditional wisdom tells us never to lend money to friends. But traditional wisdom has it slightly wrong. Lending money and property to friends is okay, as long as you feel comfortable with the arrangement and get it in writing. That’s right—signing on the dotted line isn’t just for men in suits; making contractual agreements is important in your personal life as well. In their book, Put It in Writing!: Creating Agreements Between Family and Friends, Deborah Hutchison and Divorce Court judge Lynn Toler give us the nitty-gritty on when and how to draw up written contracts.
Why Write It Down?
You wouldn’t enter into a business deal without a written contract, so why would the rules change once friends and family members become involved? If anything, these relationships require the greatest protection against misunderstanding because they are the most important. We should turn to those close to us for help when we need it, but we also need to keep things clear.
As anyone who maintains a journal knows, writing things down helps us understand our feelings. For both you and your partner in the agreement, exploring the consequences and intricacies of an arrangement through writing gets you thinking about these elements in ways that you might not if you didn’t put pen to paper. Asking someone to sign his or her name to an agreement also reveals how committed the person is to its terms. If you’re not sure that Uncle Bob really intends to pay you back that $50, whether or not he gives you his John Hancock can be a good (though not foolproof) gauge of his sincerity.
Contracts aren’t just for lending money, either. Hutchison and Toler recommend written agreements for all kinds of social situations, including loans, house sharing, parenting, and splitting the care of aging parents with siblings.
How to Start
Hutchison and Toler stress the importance of approaching written agreements in a nonconfrontational way. You want the other parties to understand that your desire to draw up a contract is not based on mistrust—you just want to avoid misunderstandings by creating a record of the deal.
If you are the person requesting the agreement (e.g., asking for a loan), you should insist on a written agreement, even if the other person doesn’t feel it’s necessary, since it protects both of you, not just the person providing the loan. It behooves you just as much as, if not more than, it does the other person to keep track of the amount you owe and when you need to pay it back.
What to Include: The Basics
According to Hutchison and Toler, every contract should include these basic elements:
- All parties’ full names and signatures with dates
- The specific terms of the agreement, including accurate descriptions of property value and condition, exact amounts of money exchanged, deadlines for payback, and periods of loans
- How to keep track of progress, and when and how parties should communicate
- Expect the unexpected. What happens if one party doesn’t or can’t adhere to the contract? What happens if loaned property is damaged, lost, or stolen? Try to think of everything that might affect your arrangement, from human fallibility to acts of nature, and come up with contingency plans.
You may choose to have your contract witnessed or notarized, but that layer of formality is not necessary for the agreement to be binding.
What to Include: The Details
In their book, Hutchison and Toler include several chapters of specific arrangements and their applications. You can adapt the basics above for any purpose, but here are some additional considerations pertaining to everyday agreements among friends and family:
- For a monetary loan, include sections in your contract that detail the consequences if the recipient fails to repay the loan, the manner of repayment (e.g., an installment plan, including a timeline), and how and when to notify each other about late or missing payments.
- When lending property, be sure to detail the condition and value of the property at the time of the loan, as well as how the borrower is to make retributions if the property is lost, damaged, or stolen.
- If the arrangement is a residential one, like a roommate situation or a sublet, the contract should list expected financial contributions from the individual parties, as well as shared expenses, housework requirements, privacy policies, and rules regarding overnight guests. Hutchison and Toler point out that this type of arrangement is increasing in frequency and importance now that the poor economy is driving more and more adult children to move back in with their parents, sometimes with their own families in tow.
- Among siblings caring for aging parents, the parties should specify how they will divide expenses, make decisions, and communicate.
These are just a few examples of instances in which contractual agreements may be helpful and necessary, but any situation benefits from a written record.
What Happens Next
After you draw up your agreement but before you sign it, you should read it aloud to all parties and address any questions that may arise. Bringing in an objective party may be helpful at this point, since he or she can point out elements of your arrangement that you might have missed.
Once the agreement is signed and you make copies for all parties, be consistent about keeping track of your progress according to the terms you should have already outlined in the document. If all parties agree, you can renegotiate terms or adjust schedules by initialing next to any changes you all make together.
Writing a contingency plan into your contract will help you answer that ugly question “What happens if the other person doesn’t hold to his side of the agreement?” Hutchison and Toler describe a progression of enforcement measures that you should follow if the other party fails to adhere to your contract. You may wish to include these steps in your contingency plan:
- Face-to-face, casual communication should come first. Avoid a threatening tone; at this point, you’re just trying to clear up a misunderstanding. Strike a balance between a request and an inquiry with phrases like “I noticed you didn’t [do such-and-such] and I was wondering if there was some problem,” or “Hey, I didn’t receive your check for this month. I just wanted to make sure everything is going okay.”
- If the above yields no results, write a letter. That way, you have a record of your attempts to remedy the situation. Include the dates and details of the lapsed payment or other breach of agreement, the measures you have already taken, and the course of action you will pursue if the party doesn’t come through.
- If both efforts to mend things on your own fail, you’ll need to seek professional help from a third party. Hire a mediator or arbiter, both of whom specialize in conflict resolution but won’t charge you as much as an attorney. You can find one through nonprofit centers or the Yellow Pages.
- After a failed mediation, consider bringing your suit to small claims court. Most states allow you to file without retaining an attorney, but it may be a good idea to get some professional advice if you can afford it. Find out more about small claims court through your state’s attorney general’s office.
As you take all of these steps toward resolution, already having a signed agreement in place will really help you settle things fairly.
It’s Agreed: Contracts Are a Good Idea
In almost every situation in which friends and family make agreements with one another, creating a record of the arrangement serves everyone’s best interests. From beginning to end, a written contract will help you reflect on the agreement, plan for eventualities, and resolve conflicts. So go ahead—lend money to your friends. Just get them to sign on the dotted line first.