I don’t blame them really, but every day people lend friends or loved ones money on a verbal promise that they will be paid back.  And if they don’t pay you back, the verbal promise is where all of the trouble starts.

In any lawsuit, you have the burden of proving everything you allege.  If your testimony is that money you gave was a loan and the defendant says that it was a gift, who is the Judge to believe?

So if you are going to loan anyone money, no matter their relationship to you and you hope to be paid back some day, you need to put together a promissory note.

It doesn’t have to be that detailed.  “I Joe agree to lend Jane $5,000.  This money shall be considered a loan that needs to be re-paid by January 1, 2014.”  That might not be the greatest example, but if you each sign it then it shouldn’t create confusion as to what the money was for.  Getting it witnessed is even a better idea.  If you Google promissory note sample you’ll find a bunch of free examples.  You don’t need to pay a lawyer to do this properly.

Some people are uncomfortable asking to put the loan in writing because they don’t want to come across as if they don’t trust the other person.  Really??  You are giving them money.  They should be willing to do whatever you want.  It’s not as if you are asking them to do something dumb or illegal.  Can you imagine a bank lending them cash with a verbal promise that they’ll pay it back?  Of course not because that’s not how life really works.

You never lend somebody money or do anything else in life with the thought that you are going to have to sue them one day.  But at the same time, you prepare for the worst case scenario so there is no confusion as to what is really agreed to.  It’s just a smart way to live life and your only way to win a lawsuit if it comes to that.

Written by Michael Helfand