Should I Help a Family Member with Debt?
My brother is really deep in debt; he doesn’t have a job and he needs help. I want to help him, but I also don’t want to ruin our relationship by mixing money and family. It’s not like he’s lazy or he’s a moocher—he just can’t find work right now and he’s really struggling. I know he wouldn’t have come to me unless he was desperate, but knowing that is just making this decision harder.
Lending money to a family member can be a recipe for disaster. Still, it doesn’t always turn out that way and as long as you go into it with your eyes open. You may be able to help your brother and still enjoy holidays without a lot of tension and fights over debt.
Step 1: Assess the timeframe and potential for repayment
First, it sounds like even you believe that your brother’s situation is temporary. Given enough time and effort, he should be able to find full-time employment—especially now that the job outlook the U.S. is getting stronger and stronger every month.
That’s a completely different situation from just lending to a family member who doesn’t want to work. However, it’s still fraught with some financial risks that you need to understand before you start funneling any money his way.
Step 2: Understand where you will fall on the repayment priority list
Next, consider what you said about him being desperate enough to ask you for help. That probably means that he explored every other possible avenue before he came to you. So, his savings are likely drained, his credit cards probably maxed out, he may have multiple payday loans to repay, and even debts to other friends and family who he asked first.
So once he gets a new job, there may be a lot of catching up to do; as his sister, you may be at the bottom of the list of who gets paid back. At best it may take years for him to get around to paying you back—if he ever pays you back at all.
Step 3: Decide if you can afford to never see that money again
There’s an old adage that you should never loan money that you don’t mind losing. That rings especially true with family. If you loan money with the thought that you may never get it back, you won’t be disappointed or frustrated if your brother doesn’t pay what he owes in a timely enough manner.
So our advice would be to first check your own budget and finances to see if you have cash available that you wouldn’t mind parting with—possibly without getting paid back. If you have cash that isn’t allocated for something else and the money you’re lending isn’t delaying any important purchases that you need to make, then you’re in a position where you can afford to lend to your brother.
Step 4: Ask how the funds will be used
The next piece of advice would be to make sure the money is going to good use. If what you’re lending is only going to be used to pay off interest or penalties then the money won’t make a real impact on the debt. That’s not a good use of the money you’re lending. On the other hand, if he’s borrowing money to make a settlement offer so he can clear away all of his unsecured debts or to keep his house out of foreclosure, then that may be worth it.
Step 5: Discuss alternatives
You may also want to discuss what he really plans to do moving forward. Is bankruptcy off the table? If so, why? If his credit has already hit rock bottom and he’s not protecting any major assets, then really the only thing he’d be avoiding would be the stigma of going through the bankruptcy process. At the very least, has he gone through credit counseling to get a professional opinion on his situation?
He may be able to get some type of part-time or hourly employment and make reduced payments on his debts through a debt management program or – if his debts are too far gone in collections – look into debt settlement. All of these options would help him start to get ahead even before he gets a new job in his chosen career field.
Step 6: Set clear terms
If you go through all of these steps, then you and your bother will be going into this arrangement fully informed. But even so, you need to set out the terms of your agreement carefully:
- How much money are you lending in total?
- What date do you expect to be repaid?
- If you are arranging monthly payments, what is the amount and how many payments will they need to make to pay off the debt?
- Will you charge interest?
This will help you protect your relationship, but it can also help you avoid unintended consequences with the IRS. It may sound unfair to charge a family member interest. However, if you don’t then the IRS may treat the money as a gift. In this case, you could be taxed on it if it is above a certain amount.
If you argue that the money was not a gift but a loan, then the IRS can tax you on the interest that they believe you should have charged. Thus, it can be a good idea to charge at least the IRS Applicable Federal Rate. This interest will count as income for the year that you received it.