Lending money between individuals is a common practice that allows people to help each other financially and bypass banking institutions. However, this transaction is not without risks and must comply with certain rules to avoid conflicts or fraud. This article explores the applicable regulations and the debt recovery procedures in the event of non-repayment.
I. Legal Framework and Regulation of Lending Between Individuals
The legal framework, although sometimes overlooked, is essential for private loans to take place in a climate of trust and legality.
What should you know about lending between individuals and what are the stakes?
Lending money between individuals, also known as a “loan between friends” or “family loan,” refers to a financial transaction between two individuals without the involvement of traditional financial institutions.
This type of loan is often entered into between relatives or acquaintances and generally relies on a relationship of trust.
By nature, this form of loan offers several advantages, such as reduced costs and greater flexibility in repayment terms.
However, lending money between individuals is not without risk, particularly due to the possibility of disputes and tax implications. It is therefore essential to formalize this type of agreement to clarify the rights and obligations of each party and avoid misunderstandings.
What are the legal obligations of the lender and the borrower?
When a loan agreement exists between two individuals, compliance with certain formalities is required to ensure its legal validity.
A loan of money between individuals is generally classified as a real contract, meaning that it is formed by the delivery of the loaned funds. Unlike loans granted by professional lenders, which are consensual contracts, a loan between individuals requires the actual delivery of funds to be legally formed. Indeed, a loan contract granted by a professional is formed upon the exchange of consent between the parties (Cass. 1e civ. 27-11-2001 no. 99-10.633: RJDA 4/02 no. 419; Cass. 1e civ. 19-6-2008 no. 06-19.753: RJDA 5/09 no. 464), whereas, when granted by a non-professional, it is only concluded at the time the loaned sum has actually been delivered to the borrower (Cass. 1e civ. 25-6-2009 no. 08-11.931: RJDA 12/09 no. 1112).
If the amount loaned is substantial, a written document provides security for the lender. In the absence of such a document, the borrower could claim that it was a gift rather than a loan. In that case, they will be presumed to have received a manual gift, and it will be up to the lender to prove the existence of the loan. When amounts exceed 1,500 euros, this proof can in principle only be established in writing (French Civil Code, art. 1359; Decree no. 80-533 of 15-7-1980). One of the main steps is therefore to draft a loan agreement as written evidence when the amount exceeds 1,500 euros (art. 1359 of the French Civil Code). Each party must have an original copy (art. 1375 of the French Civil Code) and certain handwritten formalities (art. 1376 of the French Civil Code) must also be fulfilled.
However, if the relationship between the lender and the borrower is particularly close, especially between parents and children, courts generally recognize a moral impossibility of requiring a written document.
What document should be drawn up? It is possible to formalize the transaction through a notary by drafting a loan agreement. It is also possible to use a private deed, whether a loan agreement signed by both parties or a simple acknowledgment of debt signed only by the borrower. This deed can be countersigned by a lawyer, thereby ensuring that no challenge can be raised subsequently by the borrower. Regardless of the form chosen, registration of the deed may be useful to give it a certain date.
This document must specify the loan amount, any applicable interest, and the repayment terms. This is what will serve as written proof of the agreement in case of disagreement or dispute.
In France, any amount lent exceeding 5,000 euros must also be reported to the tax authorities. This rule aims to regulate transactions between individuals and to ensure that any interest received is taxed.
Regarding family loans and taxation, if the loan bears interest, the interest is subject to income tax as income from receivables. It is taxable at the flat-rate withholding tax (PFU) of 12.8%, to which 17.2% in social contributions is added, or, at the taxpayer’s overall election, at the progressive income tax scale.
To avoid tax and legal issues, both parties must comply with these transparency obligations.
What is the importance of the acknowledgment of debt?
While it is preferable to draw up a loan agreement, an acknowledgment of debt can be an alternative in the context of a loan between individuals. Signed by the borrower, it confirms in writing the commitment to repay the loaned amount. This document becomes essential evidence for the lender in the event of non-repayment.
A properly drafted acknowledgment of debt must include specific elements such as:
- the amount borrowed;
- the applicable interest rate, if any;
- and the repayment schedule.
Although notarized registration of this acknowledgment is not mandatory, it strengthens its legal value in the event of a dispute and provides additional security for the parties involved.
Point of caution: an acknowledgment of debt signed by the borrower may constitute a commencement of proof in writing. However, if it does not mention the actual delivery of the funds, it is not sufficient to prove the loan, since a loan between individuals is a real contract (Cass. 1e civ. 9 February 2012, no. 10-27.785 (no. 165 F-PBI).
The usury rate or the legal interest rate threshold
In the context of loans between individuals, it is important to understand the concept of the usury rate, which refers to the maximum legal interest rate that can be applied to a lending transaction. This rate varies depending on the amount loaned and the duration of the loan.
In France, usury rate regulations protect the borrower against excessive interest rates and expose the lender to penalties in the event of non-compliance. It is set every three months by the Banque de France.
II. Remedies and Debt Recovery in Case of Non-Payment
In the event of a dispute, the parties may face evidentiary difficulties. For example:
- If the lender cannot prove the delivery of the funds, the loan may be reclassified as a manual gift.
- If the borrower disputes the existence of the loan, it is up to the lender to prove the claim.
Furthermore, when a borrower fails to comply with the agreed repayment terms, the lender must consider various recovery options. Several stages, from negotiation to judicial intervention, may be considered depending on the situation and the degree of cooperation from the borrower.
Amicable means of debt recovery
The first step in recovering amounts owed relies on amicable means. These measures help avoid lengthy and costly judicial proceedings.
- Direct negotiation
Direct negotiation is often the first recourse, where the lender contacts the borrower to understand the reasons for the payment delay and jointly explore possible solutions for an amicable settlement. This open approach can help reach a compromise and restore payments.
- Payment installment plans
If the borrower is experiencing temporary financial difficulties, the lender may propose a payment installment plan by revising the repayment schedule. This flexibility helps the borrower get back on track without worsening their situation, while allowing the lender to progressively recover the amounts owed.
- Formal notice of default
Finally, if these initial steps fail, the lender may send a formal notice of default to the borrower. This formal document reminds the borrower of their repayment obligation and sets a final deadline before proceeding to more coercive measures.
The formal notice of default marks an official step that can often encourage the borrower to regularize their situation before resorting to judicial remedies.
Judicial proceedings
If amicable attempts fail, the lender may initiate judicial proceedings to recover their money.
- Order for payment
The order for payment procedure is one of the fastest methods and allows obtaining an enforceable title. This procedure is appropriate when the claim is not disputed, and it requires providing certain documents substantiating the debt.
Once the order for payment is validated, the enforceable title allows for seizures to be carried out in the event of non-payment.
- Summons for payment
If the borrower disputes the claim, the lender will then need to proceed with a summons for payment before the court. This procedure is longer and may require the assistance of an experienced lawyer to effectively defend the case before the judge.
It allows for a formal court decision on the amount to be repaid, but it represents an investment in time and costs.
- Wage garnishment
In certain cases, after obtaining a favorable judgment, the lender may request a wage garnishment of the borrower. This measure consists of directly deducting a portion of the borrower’s salary to progressively recover the amount owed.
Wage garnishment is an effective measure, but it can have consequences on the borrower’s professional and financial situation.
Costs and timelines of debt recovery proceedings
Judicial debt recovery proceedings involve costs that the lender must take into account, including:
- attorney fees;
- bailiff fees for service of documents;
- and potential court costs.
Depending on the complexity of the case, these costs may increase.
The timeline of an order for payment procedure is generally shorter than that of a summons for payment, but any judicial remedy remains subject to varying timelines depending on the courts and the level of cooperation from the borrower.
Impact on the lender and the borrower
Debt recovery proceedings have repercussions for both parties.
- For the lender
For the lender, it is essential to be patient and rigorously follow the legal steps in order to recover their money.
Judicial proceedings, although costly and sometimes lengthy, can guarantee repayment in time if pursued with perseverance.
- For the borrower
For the borrower, the consequences can be severe. A payment default exposes them to the risk of over-indebtedness, and seizure or recovery proceedings can affect their financial situation in the long term.
In the event of a seizure, the borrower may also be listed with credit agencies, making it more difficult to access future loans.
III. Tips for a Successful Loan Between Individuals
A loan between individuals can be a flexible and advantageous alternative to bank loans, but it requires certain precautions to be carried out safely. Here are essential tips to properly frame this type of agreement.
Properly assess repayment capacity
Before granting a loan, it is essential to verify that the borrower has a genuine financial ability to repay. Loans between individuals, especially between friends or family, must be based on mutual trust, but financial risks should not be ignored.
An open discussion about the borrower’s financial situation allows for a better assessment of repayment possibilities and anticipation of potential problems.
By taking the time to verify whether the borrower is able to make a financial commitment, the lender ensures the viability of the agreement and avoids misunderstandings.
Put the loan terms in writing
Even in a context of trust, it is recommended to formalize all loan terms in writing. A written contract helps avoid ambiguities and strengthens the security of both parties in the event of a disagreement.
This document must include specific information such as the loan amount, repayment deadlines, and interest, if any.
To formally frame the loan, the lender may use document templates specific to loans between individuals, including an acknowledgment of debt signed by the borrower.
For significant loans, registration with the tax authorities gives the deed a certain date.
This written contract provides legal protection and constitutes evidence in the event of a dispute.
Finally, remember to keep proof of the delivery of funds: for example, a bank transfer or a receipt signed by the borrower.
Arrange for a surety or guarantees
To further secure the loan, it may be wise to arrange for a surety or some form of guarantee.
An additional guarantee reassures the lender and covers the risk in case of repayment difficulties by the borrower. This guarantee can take various forms, such as a mortgage, a pledge, or a surety bond on assets.
Depending on the agreement between the two parties, this guarantee will help protect the lender’s investment in the event of default.
Avoid conflicts through open communication
Open and regular communication is an essential factor in a loan between individuals. Maintaining constant contact allows for monitoring the borrower’s financial situation and addressing problems before they worsen.
In case of difficulty, a transparent discussion helps find amicable solutions, such as adjusting the repayment schedule, while preserving personal relationships.
Transparency in exchanges is therefore necessary to prevent any deterioration of relationships and to ensure harmonious management of the situation.
In summary
Lending money between individuals is a practical and flexible solution, but it is nonetheless subject to strict rules. To avoid disputes, it is essential to formalize each step and follow debt recovery procedures in case of problems.
A well-structured loan, with an acknowledgment of debt, clear terms, and open communication, helps preserve relationships while ensuring a degree of legal certainty.
Need assistance with debt recovery or repayment of a loan between individuals?
Maitre Mikael Le Bot, banking law attorney in Paris, assists you with all procedures to secure and enforce your rights.
