Here’s an unusual story: A woman lends a relative a boatload of money. He pays her back. In full. With interest.
End of story, right?
Wrong. Read further.
Chelsea, a freelance photographer in her late 30s, reached out to me on Facebook. All I had to do was mention “family” and “loans” and she raised a virtual hand. “Let me tell you about my dad,” she wrote me.
We spoke at length and she shared her story.
Her father was larger than life and financially successful by all external appearances, Chelsea told me. He retired early after serving as the CEO of a Fortune 500 company. He and his second wife, Lola (Chelsea’s stepmother) lived in ritzy West Palm Beach, owned a condo in Denver, and travelled often. They lived the great life.
And why not? Her dad worked hard during his long career, and not just running The Big Famous Company; he also started businesses in various industries. “Making money was never an issue for him,” she explained to me.
How the loan began.
Chelsea was 28, newly married to Carl, and they had just bought a house (at, what we now know, was the height of the real estate boom).
Dad wanted to borrow $50,000 from Chelsea to buy several frozen yoghurt franchises. It was a short-term loan; he assured her he needed the money for only thirty days to cover a cash flow crunch.
Chelsea didn’t hesitate. “I didn’t even think about it. Never occurred to me that it might be a problem.”
She agreed to loan her dad the money, without discussing it first with Carl. Contrary to what you might expect, her decision was never an issue in their marriage. Carl “wasn’t super excited” but he didn’t protest.
They took a home equity loan and gave the cash to Chelsea’s dad, without a written agreement.
Thirty days go by. Dad sends her the monthly interest payment on her loan, but says he needs another thirty days to pay back the $50,000 principal.
She agreed, but he kept procrastinating. In her father’s mind, it shouldn’t be a concern for Chelsea. “What’s your problem? It’s not costing you anything, I’m paying the interest,” he brushed her off.
A year after the loan.
The frozen yoghurt shops failed and her father sued his business partner. He lost the lawsuit, plus all the money he sunk into that venture.
Dad’s wife Lola knew nothing about her husband’s finances. She was clueless that he borrowed from his daughter and had a long string of unsuccessful businesses. Meanwhile, they enjoyed extended vacations at posh resorts in Bermuda and Paris. Lola always had the latest Prada outfits and whatever cars she wanted. A sleek yacht was docked at their mansion.
In contrast, Chelsea and Carl lived frugally. But she didn’t care how her dad spent his own money.
How could he afford his lavish lifestyle but couldn’t — or wouldn’t — pay her back? She was annoyed, but didn’t say anything directly to him. She sort of hinted around about the loan.
For the first time, Chelsea saw the cracks in her father’s facade. He wasn’t an upstanding man who kept his word. She lamented to me, “He was no longer my dad; he was just an ordinary person.”
Chelsea didn’t want to get stuck with the loan balance. What if something happened? Her concern was legitimate; by now they had a baby and she had to quit her job. Carl worked overtime to cover their growing expenses. Their house plummeted in value.
Her dad agreed to pay back $20,000 of the original loan; less than half, but at least it was a good chunk of the outstanding debt.
Two years after the loan.
Fast forward. It’s now two years since Chelsea blindly handed over $50,000 to her dad. “One day, I just lost it, I was done,” she told me. “I called him in tears and told him, ‘I need you to pay me back. It’s costing me sleep and peace of mind. Carl and I argue frequently about it.'”
It was a lie.
She and Carl never discussed the outstanding loan. It wasn’t a cause of friction in their marriage.
Yet Chelsea knew how to hit her dad exactly where it counted.
Her trick worked. She could hear it in his voice. He faltered, “Carl wants me to pay it back?” He didn’t want his only son-in-law to think poorly of him. Maintaining the image of being a super-successful man was his paramount concern.
Chelsea and her dad got into a heated argument. He said, “You’re my only kid. You’ll get all my money when I die. Or else you can get the rest of this loan now and that’s all.” He slammed down the phone.
In shock, Chelsea realized that her dad never had any intention of paying her back. Or that if he did repay the debt, she’d be disinherited.
Three days later, Chelsea and her dad managed to have a calm conversation. He promised to send the $30,000 balance in a few weeks.
Loan paid in full.
He did. Paid his debt to her in full. Including interest.
Chelsea assumed her dad took the money out of his 401(k) account. She knew that top executives received compensation packages with healthy retirement benefits.
Unusual, isn’t it?
I’ve chronicled many instances of loans between family members and friends that went bad. The borrower welched. Relationships and finances were destroyed forever.
Not the end.
But that’s not the end of Chelsea’s story.
Not by a long shot.
Two years after paying her back, Chelsea’s dad passed away. She and her stepmother Lola were the sole beneficiaries of his trust.
Horrified, they discovered that there were no assets. None.
On the contrary, a mountain of debt — of Everest proportions — loomed large. The West Palm Beach mansion was engulfed in a $1.5 million mortgage and home equity loan. Dad owned his mother’s house in Portland, but it was deep underwater. He owed at least five years’ back federal and state income taxes. Payroll taxes for employees of his numerous businesses around the country were unpaid. Lots of outstanding loans to vendors and lenders totaled over $3 million.
How had an accomplished, shrewd, businessman messed up so badly?
Chelsea shared her theory with me:
It’s like he had a gambling problem. He’d get a brilliant idea, borrow money from people, and start a business. When you have an existing company, people aren’t too interesting in investing. But if you have an exciting new concept for a product or service, people will jump at the chance to be a part of it. His downfall was that he never thought the whole idea through. He’d get impatient and wouldn’t give the business enough time and money to grow.
The more Chelsea dug as she tried to settle the estate, the more worms crawled out from under the financial rocks.
Remember when he paid her the final $30,000 out of his 401(k) account?
Wrong. He had sucked that account dry.
Chelsea discovered that her father borrowed $100,000 from his brother. She can’t be sure, but Chelsea thinks that was the source of her repayment cash. And it wasn’t any surprise that her uncle was left high and dry on his loan.
Out of the wreckage.
Chelsea is resourceful. She rescued the frozen yoghurt business, sold it to the managers, and the owner-financed payments will support her dad’s widow Lola for several years.
She wasn’t surprised she didn’t inherit a fortune, but Chelsea was annoyed that she spent a considerable amount of time straightening out the mess of her dad’s botched financial affairs.
I asked her what caused it all. She answered quickly, “Not being honest with his wife. A lot of his problems stemmed from covering up the money problems, spending money he didn’t have, trying to keep up big appearances, and being unable to admit it wasn’t going so well.”
I asked her, “Would you do it again? Loan the money to your dad?”
“No way,” she said. “If a person can’t get money from a bank, then they don’t know what they’re doing.”
Fortunate for Chelsea, she didn’t lose any money, and her marriage was unaffected by the whole debacle.
However, she lost something much more significant: respect for her father.
Have you ever loaned or borrowed money from family? How did it change your relationship?
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Get a whole book of stories! Read the award-winning Gold Diggers and Deadbeat Dads: True Stories of Friends, Family, and Financial Ruin.
The 7-year-old Who Supported Her Dad
I Loaned and Lost $5,000. I’m Not Rich. Why Was it No Big Deal?
Would You Loan Your Family Money, Even if You Knew They Lied to You?
Your Rich Aunt Dies and Leaves You a Fortune – Now What?
How to Loan Money to a Friend
Image © iStock.com/Kiyyah