Expert: Mike Weikle - 2/23/2009

Question
i took out a equity loan for a good friend who was in financial trouble.  He has not paid be back nor has he paid me  monthly for the bill.  What can i do?

Answer
Hi Dave,

Did your "good" friend sign the home equity line note?

Did you just hand over the money to your friend or did good friend  sign a note with you?

What did good friend give you as collateral to secure his promise to pay you back?

Has your good friend filed for bankruptcy?

The first thing is you will have to make the payments or the lender can foreclose on your home.  If the payments are already more than 30 days past due, your credit has already been damaged.

If you cannot make the payments, you need to consolidate your equity line with your mortgage to get the payments within a range you can afford to pay.  Your payment could be less now since interest rates have dropped and your new rate could be lower than your current rate.

If the amount is less than $10,000 you could likely sue the friend in small claims court which in most states has a limit of $10,000.  You can let me know what state and how much and I can tell you whether or not you can take your claim to small claims court.

Even if you do not have a note from your friend, you can sue so long as you have some evidence to show you loaned them money.  

If the friend has already filed for bankruptcy, you will likely not get very much, if anything at all.  

If the debtor has taken bankruptcy and you are not getting as much back as you gave them, you should send in a 1099 MISC Income to the IRS for your friend so he can report it as debt forgiveness income.  Also, it might be a basis to support a loan loss if you loaned the money expecting to make a profit (it does not sound like this was the case from what you stated in your question), but I would send the 1099 to your friend and the IRS anyway so at least he will have to pay tax on the money he failed to pay back.

If the amount is greater than an amount you can take to small claims court, you could sue the friend in circuit court without a lawyer.  There are a number of websites out there where you can locate a proper form.  You might also get an example of such a filing from the Court Clerk's office if you tell them you need some help.

If the amount is significant, hire an attorney to simply file the lawsuit and see if your friend files an answer.  If no answer is filed, you can get and enforce a default judgment.  

You could also turn it over to a debt collector and pay them on a contingency based on a percentage of whatever they are able to collect.