Sophie Okolo, MPH

A loved one or family member is often the first place many individuals seek assistance when they need help during a difficult moment. When someone loses their work unexpectedly or is burdened with large medical expenditures, it is common to encounter financial troubles. Perhaps they have suffered an injury, and are you have given them the details of your personal injury law firm to come to an agreement. Unfortunately, many well-intentioned family members have found themselves drawn into a financial pit due to the financial difficulties of a loved one.

Let us look at a few possibilities you might consider to assist your family members who are experiencing financial difficulties without putting yourself at risk.

1. Give them a cash gift

Providing upfront money present to a loved one who is experiencing a short-term cash flow crisis may be the best option in this situation. First, calculate the amount of money you can afford to give without putting your financial well-being at risk, and then either provide the maximum amount you can afford all at once (and inform your loved one of this fact) or give smaller gifts on a periodic or regular basis until the situation is resolved. Ensure that the money is recognized as a gift rather than a loan that they must repay to avoid putting the gift recipient in an unpleasant situation with the money.

If you are thinking about giving them a large quantity of money, you will want to watch the annual gift tax exclusion that the Internal Revenue Service establishes each year.

2. Loan them some money

A member of your family may approach you and request a short-term loan from you. Talk openly, explicitly lay down the loan terms on paper, and have both sides sign the document before proceeding. This will assist in ensuring that each party understands the financial arrangement into which they are entering. 

3. Be a co-signer on a loan

To assist with short-term financial requirements, your loved one may be interested in acquiring a loan or line of credit. But what happens when their credit compels them to seek a co-signer? Whether from a bank, credit union, or an online lender, would you be willing to co-sign on a loan or line of credit?

Before just saying “yes” and handing a family member your good credit, it is crucial to understand the legal and financial ramifications of signing a loan as a co-signer on the dotted line. Comprehend that if the other borrower fails to repay the loan, you will be legally responsible for repaying it. This is crucial information to understand. Even if you and a family member came to an arrangement that you would not be required to make payments, the lender has the right to initiate legal action against you and compel you to pay the entire amount owed.

This past-due debt will now impact your personal credit as well. As a result, if your relative fails to make timely and complete payments on the loan, the lender may report the negative account activity to the credit agencies for inclusion on your credit report, resulting in a decrease in your credit score.

Co-signing a loan is a serious matter of trust. The fact that your family member requires a co-signer on a loan indicates that the lender believes them to be too risky for the bank to take on on its own. What assurances do you have that the borrower will repay the loan if the bank is not confident that they will? Since you are legally taking on this debt and its payment as well, it is possible that you will have more difficulties in the future in obtaining a personal loan for yourself.

4. Develop a strategy for paying bills.

People who are experiencing a financial crisis are frequently unaware of where their money is being spent. If you have previous experience making and following a budget to manage your own finances, you may be able to assist your family in preparing and following one as well. Offer to show them your budget and bill-paying system and explain how it aids you in making financial decisions as a way of breaking the ice to begin.

During the course of your collaborative efforts to assist them in gaining control of their financial situation, the process will identify areas where they can cut back on costs or try to raise their income in order to meet their financial commitments more effectively.