Anyone who has ever borrowed money from a friend or family member (and we’re not talking about times you were short on change at the local store as a kid) knows that not paying it back can lead to all sorts of problems, like strained relationships or even legal trouble.
If you're in this situation, it might be tempting to avoid the topic until you find a solution. However, taking a proactive approach and communicating clearly with your lenders is key.
In this article, we'll walk you through what to do when you owe someone money and share some tips for sticking to your repayment plan.
Here's what to do when you owe someone money
Below, you'll find actionable steps you can take when you owe money you don’t have. The sooner you act, the sooner you can start getting back on your feet.
1. List all the people you owe money to
Make a list of everyone from whom you've borrowed money or have pending debts, including friends, family, brokers, institutions, companies, and services.
Consider creating a spreadsheet to track the amount borrowed, the remaining balance, any payment arrangements, and what you've already paid.
This will help you prioritize urgent payments, identify larger debts, and explore more effective debt refinancing options (which we’ll discuss below).
2. Talk to your lenders
Do. Not. Avoid. This. (Even though it feels hard.) Lenders want to be kept informed—and they deserve a real explanation, resolution, or apology, whether you owe money to someone or need to justify an overdue payment.
“Direct communication can convey sincerity and a willingness to address the issue, which may encourage a more empathetic response,” says Mason Farmani, a personal and corporate coach.
3. Put it in writing
When communicating with your lenders, start with written communication (i.e. letters or email) if possible. “This can be helpful because it allows you to carefully explain your situation, express your intention to resolve the debt, and suggest a repayment plan,” Farmani says.
However, if the situation is urgent or your relationship with the lender makes it more appropriate, you can also make a phone call or have an in-person conversation. Just be sure to follow up with a written note to document the conversation and any agreements made.
“Regardless of the method chosen, it's crucial to be calm, honest, and respectful and to come prepared with a clear and realistic plan for repayment,” Farmani says.
3. Be honest and communicate clearly
“Approaching someone about an outstanding debt requires tact and respect,” Farmani says. Acknowledge your responsibility for the delayed payments and express gratitude for their patience. Let them know you understand the impact on them and are committed to paying your debt.
Briefly explain your financial difficulties, such as unexpected medical expenses or job loss, that have affected your ability to make payments. Being straightforward about your situation, Farmani says, “can help build trust and foster a more positive outcome, instilling hope and optimism.”
4. Propose a realistic payment plan
Offer a feasible repayment plan, such as making smaller monthly payments with the potential to increase as your financial situation improves. If you're working with a financial institution, consider discussing refinancing options together to find a solution that works for both parties.
5. Consider refinancing your debt
If you’re dealing with a professional lender (rather than say, your uncle), consider refinancing. This involves replacing high-interest debt with a new loan at a lower interest rate. “This is certainly a strategy in helping people pay off debt quicker,” says financial advisor Mike Salierno of Northwestern Mutual.
And whenever you can, go above the agreed-upon minimum monthly payment (whether it’s to Uncle Bob or a credit card company). “I usually advise my clients to keep their obligation low, but their opportunity high,” Salierno says. “This means to avoid putting yourself in a position to ‘have to pay’ a certain amount for a loan every month. Instead, change your mindset by looking at the payment as an opportunity to pay a higher amount if your budget allows you to in that specific month.”
Meeting your new repayment plan
Agreed on a new repayment plan? These bonus tips will help you stay on track and manage your finances effectively as you work toward paying off your debt.
- Reassess your spending habits: Debt often results from poor spending discipline, lack of emergency funds, and inflation effects, Salierno says. While you can’t control inflation, you can tackle these other issues. Take a look at your bills, bank fees, and automatic payments to find places where you can cut back and save more.
- Create a budget: Either set up a new budget or update your existing one to get a clear picture of your income and expenses. This will show you how much you can allocate for debt repayment while still meeting your savings goals and essential expenses. (Need help with creating a budget? Check out our guide on how to make a budget in seven steps.)
- Start small, then build up: Salierno recommends focusing on paying off the smallest debt first and then applying that payment toward the next largest one: “If we focus on the biggest loan first, it's going to take so long that most people will become disheartened and probably just give up.” This strategy can keep you motivated and make the overall debt seem more manageable.
- Seek financial aid: Consult with a financial professional to assess your situation and explore available options. They can help you determine if your repayment plan is realistic and advise on any financial aid or adjustments that might be necessary.
More money? Yes, please: Check out open jobs on The Muse and find the perfect fit for your financial goals »
FAQs
Can you get sued for owing someone money?
Yes, you can be sued for owing someone money, “but it might not always be practical for them due to court costs and legal fees,” says Riley Beam, Managing Attorney at Douglas R. Beam, P.A.
Additionally, there's a time limit for suing over unpaid debts or broken contracts, known as the statute of limitations. “This period varies by state and typically ranges from three to 10 years,” Beam says. “If the time limit has passed, you can use it as a defense in court.
“To avoid legal action, it’s best to negotiate with your creditor and come to a mutual agreement,” he says. “Open communication and a willingness to repay the debt can often prevent such measures.”
Can you go to jail for owing someone money?
You won’t face jail time simply for owing someone money, as “it’s a civil matter, not a criminal one,” Beam says. However, jail could be a possibility if you ignore a court order to repay the debt, “which could be deemed contempt of court.”
I owe someone money and they are threatening me. What should I do?
Your lenders may be upset or persistent about payment, but they cannot harass or threaten jail time. If they use threats of jail or even imply it, “they are misleading you and breaking federal law,” Beam says. Contact a lawyer immediately if this happens.
Depending on the situation, you might also report them to your state attorney general, the Federal Trade Commission, or the Consumer Financial Protection Bureau.
I owe someone money and I don't have it. What can I do?
“Committing to resolving the debt can help build trust and lead to a more positive outcome” Farmani says. “Direct communication can convey sincerity and a willingness to address the issue. It's crucial to be calm, honest, and respectful and to come prepared with a clear and realistic plan for repayment.”
For more advice on managing debt, read this: How to Become Debt-Free: 7 Steps to Get There