Family debt delinquency is not only a financial disaster but also an emotional one as well. It’s on the rise and tearing so many Australian families apart.

Being part of a family brings with it the responsibility of helping each other. But when that help becomes financial the risks can be potentially devastating.

Banks are tightening their lending criteria and getting tougher with credit. As a result many borrowers are turning to friends and relatives for funding everything from a business to a home, car and travel.

Their called intra-family or intra-friend loans. It’s nice to help but not so nice when things go wrong.

We know of a number of cases, just in our circle of friends, where baby boomers have lost their entire superannuation nest egg from lending money to a relative’s dodgy business venture. Their retirement is ruined and their relationship with family destroyed.

It may sound harsh, but if you’re approached by family or friends for a loan our advice is to say “no”.

It’s better that they think you’re stingy than get into a position where you lose the money and a relationship is damaged forever.

Soften the blow by advising them on how to raise the money from another lender. Help them with their application or with the business plan to be put to a financier. Maybe organise for them to see your accountant or financial planner for some independent advice and maybe offer to pay for the appointment.

Rather than a cold hard rejection you’re seen as helping them get to their goal.

If you feel you must provide financial support, firstly go in with your eyes open and assume you’ll never see the money again. That way you won’t be surprised or disappointed when it actually happens.

Secondly, make sure you give yourself the best chance of getting the money back.

When playing the role of the bank, don’t be afraid to act like the bank. Treat it like a proper business agreement, and draw up an agreement between you both outlining the terms of the loan.

Get a solicitor to draw up the agreement so that all the pitfalls are covered and it also sends a signal to the borrower that you’re serious about making sure the arrangement is handled professionally right from the start.

Ask to see a business plan, make sure the logic and planning is sound, and don’t be afraid to offer advice and ideas if you feel there is room for improvement. After all it’s your money in the business and it’s in your interest for the business to succeed.

Make sure they are putting up some of their own capital as well to make sure they are taking entrepreneurship seriously. It’s called “skin in the game”.

Never, ever put up all the money and fall for the old line “you put in the money and I’ll put in the sweat.” Just as bank asks for a deposit and won’t lend 100 per cent on a property or business purchase, neither should you.

If the borrower has no money to put in tell them to go away and save then come back and see you.

Encourage them to perhaps pursue a side business idea to raise enough money.

Just don't let things get awkward, if you can help it. No matter what you decide, communication is the key to keeping things civil.

Borrowers should keep lenders updated with any changes in their financial situation that might affect payment schedules, but that's not always the case.

Most importantly of all don’t be afraid to bring up the subject of a repayment plan if your child is nonchalant about fulfilling their financial agreement to you… and make sure they stick to it.

Look at taking a percentage of their salary on pay day to meet the repayments. That puts you ahead of the queue before the money is spent elsewhere.

Going guarantor for a family member’s loan is another option which is often suggested. “We don’t want any money just your guarantee for the bank,” will be the rationale.

Just remember a guarantee can turn out to be cold hard cash because if the borrower defaults the bank comes after you for the full amount. If you do go guarantor, make sure its limited to a fixed amount.