What To Do When Friends Won't Pay
“I loaned a mate a few grand, and he won’t pay it back. What can I do?”
As unpleasant as this situation sounds, it is a very common occurrence and very often it is those whom we trust the most who unfortunately do not honour their commitments.
In most instances, there is no formal written contract in place, which makes it very difficult to ascertain whether there was ever a valid agreement.
So let's deal with transactions on the lower end of the scale, unfortunate situations where you may have lent cash to a friend and they haven't paid it back.
When you are owed money, the law recognises you as a ‘creditor’ and the person or entity that owes you money is referred to as a ‘debtor’.
In NSW, we have access to the Small Claims Division for matters of less than $10,000. However, before you begin a claim here, take a few preliminary steps as court action should be the last resort because of the cost and the potential damage to friendships.
The first step should be to attempt to negotiate with the other person to try to reach an agreement. You may be willing to accept a lesser amount, or even negotiate some form of payment plan over a period of time.
Another possible solution is mediation, whereby both the creditor and debtor agree to bring in a neutral third party such as a mutual friend, family member or even a formal mediation service. If an agreement is reached, be sure to place it in writing and have it signed by both persons.
If these are unsuccessful, you should begin more formal steps and issue a ‘letter of demand,’ which becomes a little less amicable. This is simply a letter to the debtor, outlining the amount they owe you, the reason and when it should have been paid. The letter also states that if you do not receive the money by a certain date you intend to initiate legal action to recover the debt and that the debtor may be liable to pay your court costs and interest on the debt. It is important to keep a copy of this document, properly date the letter and provide the correct name and postal address.
If these measures are unsuccessful, then it may be appropriate to initiate a claim in the Small Claims Division. This involves obtaining a Statement of Claim Form, properly filling out the form, filing it, paying an administrative fee and serving it upon the debtor.
What happens next is highly dependent upon the action taken by the debtor. They may dispute the fact and provide a defence, file an Acknowledgement of Liquidated Claim which is effectively an agreement that they owe a debt, file nothing and pay nothing or even pay the amount stipulated on the Statement of Claim. The Small Claims Division will apply the appropriate law to the dispute, and provide a resolution in due course.
Be mindful that at any stage of this process you can settle outside of this court process.
NOTE: This information should not be relied upon as legal advice. If you are unsure of the process and/or your rights you should seek appropriate legal advice.
If you, your family or friends wish to enquire about a similar circumstance, please email us on our "Ask Us a Question" feature or call (02) 4228 8288 to speak to one of our specialist compensation lawyers.