Unless you’re independently wealthy, acting as the family bank and personal lender could do serious damage to your financial health, even leading you to bankruptcy.
Reasons why becoming the personal lender could lead to bankruptcy:
- Personal loans are often not repaid and if they are particularly large or numerous the lack of repayment could lead to bankruptcy. It may be the shadow side of human nature but many of us feel entitled to the personal resources of those closest to us, this is why many loans made by family or friends are never repaid. This lack of repayment can become the first step of your journey into bankruptcy.
- Personal loans made by family or friends are dischargeable in bankruptcy like other forms of unsecured debt. If a personal loan is discharged in bankruptcy you will not be able to pursue that borrower for repayment-not ever.
- When an individual loans money to a friend or family member that is money taken away from savings or paying bills. Even if you are not in bankruptcy, lending your scarce money to others insures that that money is not available when you have an emergency that requires an influx of cash. This is another sure way to end up with more debt and facing bankruptcy.
A final note on lending money to family and friends…Although this is becoming more common, it is never wise to borrow money from a credit card so that you can lend it to a family member or friend. No matter how dire their situation, understand that when you borrow money from a credit card you are making yourself vulnerable to financial decline that can lead to bankruptcy.