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Did you loan money to someone and haven’t been paid back? When someone owes you money and won’t pay, you are put in the difficult situation of playing "debt collector." In this article, we review what to do when someone owes you money and refuses to pay, what your out-of-court options are for getting your money back, and what you should consider when thinking of escalating the situation and suing someone in small claims court to get your money back.
Send a Demand Letter
A demand letter is a formal letter that requests repayment.
A formal letter to someone who owes you money has the following benefits:
They take you more seriously with a letter. A letter tends to show you are serious about getting your money back. Usually, a letter symbolizes you are putting things in writing before escalating the issue.
Sending a letter is a low-cost, low-effort way to get your money back. The person who owes you money may decide to pay you without you having to take further action and spend more money.
It may clarify a situation that arose out of miscommunication. Writing out what happened and why you are requesting to get paid back, may clarify to the other party what happened.
In some small claims courts, you are required to ask for payment before suing or a judge will want to see evidence of this. For example, in California small claims court, you are required to first request your money back before you can file the lawsuit. While you can request your money or property back orally, it is suggested you do so in writing in the form of a demand letter.
Unsure of what to include in your demand letter? Here are a few suggestions:
How much money you are owed.
When you lent them the money.
Your contact information.
Where to send payment.
Option to pay using a payment plan.
Option to mediate.
Give them a few days to respond (usually about 14 days).
Let them know that if they don't respond, you intend to sue.
Can You Go to The Police If Someone Owes You Money?
You may go and report this matter to the police but they will probably tell you it is a civil matter and they can’t handle it. Unless the matter also involves violence or an immediate threat there is really not much that the police can do for you if someone owes you money on a loan.
More likely, the police will direct you to sue them in court, and depending on the amount you are owed you can file the lawsuit in small claims court.
Using Empathy As a Way of Getting Paid Back
What should you do when the person that owes you money is a friend or someone close to you? If the person that owes you money is a friend, family member, or someone you are close to, try to influence them to be more empathetic with what you are going through. You trusted them to pay you back after you lent them money. You may not have been doing so well yourself but knew they needed the money more than you did. Show them and explain to them how you feel.
Here are some examples:
You lent your friend money to buy a car so she could finally drive to work. You are now struggling to pay your bills because you were expecting her to pay you back by now. Show your friend your unpaid bills or any debt collector notices.
You lent your co-worker money to pay the bills for a baby he was having. You are now struggling to pay for your own kid's daycare. Show and explain to your co-worker that you are having trouble paying for daycare because they haven't paid you back.
You lent your cousin money for gas so that they could go to work. Your job laid you off and now you are struggling to get off your feet. Tell your cousin what you are going through as they have also been in the same situation.
If they are able to empathize with you, they will understand why you need to get paid back quickly.
Ask For Repayment Directly
Maybe you haven’t heard from the person who owes you money in a while, call them to see how they are doing and what’s going on. As you are catching up remind them about the loan and the agreement they made to pay you back within a certain time period.
Empathy will be a good tool here as well, so don’t forget to tell them what you need to use the money for, especially if you have immediate expenses to pay.
Offer a Payment Plan
If you lent someone $1,000 and told them to pay you the $1,000 back once they had the money it may be hard for them to come up with the $1,000 all at once. Let the person know that they can pay you back $50 per week until the full $1,000 is paid for.
It is much easier for someone to pay in installments than a lump sum payment. It is also a good idea to ask them how much money they feel comfortable paying and when. If they say, I can pay you $100 every 15th of the month, then it was their idea how much they could pay you and when. It is easier to get "buy-in" from someone when it is their idea.
Brainstorm Together Other Creative Ways to Get Paid Back
You have tried to talk to the person who owes you money about them paying you back but you are not making any progress. Now what? Ask them to sit down with you and brainstorm ways that you can be paid back the money you loaned them. As we mentioned in the previous section, it is easier to get "buy-in" from someone when it is their idea and a brainstorming session may stimulate some good ideas.
How to ask them to brainstorm ideas? Tell them, "Look I understand you can't pay me the money I loaned you, but I would love to brainstorm ideas on how we can cancel this debt."
Write down all the ideas. It is really important to write down all the ideas that you both come up with. As you are brainstorming, agree not to comment on any ideas until after you have exhausted all options. Commenting on ideas you are putting down on paper during the brainstorming session may discourage the other person from offering other ideas based on your comments from the first ideas.
Review the ideas for repayment. Once you are done brainstorming the ideas for repayment, take a moment to read them out loud together. Go through each idea and tell each other what you think about each idea. You can go over any pros or cons of each idea.
Here are some examples of creative solutions on how to get someone to repay the money you lent them:
You lent money to a friend you know loves and makes the best BBQ and your birthday is coming up. Instead of having them repay you the money you lent them, have them cook your next birthday meal.
You know you really need your garage to be cleaned out and it is going to take you the whole weekend to clean it out. Ask the other person if they are willing to clean and organize your garage and in return, they don't have to pay you the money they borrowed.
You need to find someone to take care of your dog while you have to be out of town. You know the other person loves dogs and would take care of your dog as if they were their own. You know it is going to cost you a lot of money to have someone take care of your dog. Ask the other person if they can take care of your dog while you are out of town in exchange for the money you lent them.
Think About Going to Mediation
What is mediation?
Mediation is a meeting between you, the person you lent the money to, and a neutral third party called the mediator. A mediator is not going to force you and the other person to come to an agreement and is not going to determine who is right and who is wrong (that is what judges do).
A mediator is going to help you and the other person come to an agreement together on how to resolve the issue at hand. The mediator is there to facilitate conversation between both you and the person that owes you money, this means the mediator is going to help you talk to each other without interruptions.
Benefits of mediation:
The mediator will help you brainstorm solutions on how the other person will repay you for the money you lent them.
The mediator will make sure you are not talking over each other and that the conversation remains respectful.
Sometimes having an outsider's perspective will help you see a situation differently.
It is less intimidating than going to small claims court for money owed.
You may be able to be repaid quicker than going to court especially if you and the other person come up with ideas on how they can repay you for the money you lent them.
Mediation tends to be very successful between people who have a longstanding relationship and a relationship that will likely continue for the foreseeable future.
How Can I Try to Mediate With Someone Who Owes Me Money?
In most states, there are many organizations that provide free or low-cost mediation. Run a google search for "mediation near me" and you will find one of the many organizations providing mediation. Many times they are run by volunteer mediators.
Many small claims courts also have free mediation available or as part of the small claims process. Check with your local small claims court about mediation to see if your case can be mediated before the hearing.
When All Else Fails, Consider Going to Small Claims Court
Really often we get the question, well can I sue someone I lent money to in small claims court? The answer is yes, so long as the amount you want to sue them is within the small claims limit of your local small claims court. For example, in California and in New York City, you can sue someone who owes you money in small claims as long as that amount is $10,000 or less.
You also want to make sure you are suing someone for money you lent with the expectation that it would be paid back and not over a gift. Legally if someone owes you money, this means it was a loan from you to them and there was a clear expectation that there was a duty to pay the money back within a certain amount of time. If this information is in a contract or written agreement this will be more helpful in court, but you may be able to provide other evidence like emails, texts, money transfer receipts, etc.
Here are some examples of common small claims lawsuits against someone who owes money:
You lent your ex-boyfriend money for bills, rent, food, and gas. They promised to repay you in a few months once they received their first paycheck. Months passed and they keep saying they will pay you back the next month. You decide to sue them in small claims court for all the money you sent them via Venmo.
Your friend borrowed money for you to pay a security deposit on a new apartment they were renting. They promised to pay you back as soon as they got their security deposit back from the old unit they were renting. It has been 6 months and you have not heard back from your friend. You decide to sue them in small claims court for the money they borrowed from you.
You lent your co-worker money to buy a car. They promised to pay you back, but they show up to work every day and they are ignoring your requests to get repaid. You decide to sue them in small claims for the money you lent them for the car.
Chief Legal Architect & Co-Founder @ People Clerk. Camila holds a law degree and is a certified mediator. Her passion is breaking down complicated legal processes so that people without an attorney can get justice.