The step-by-step path when a family loan goes unpaid: a calm reminder, then a formal demand letter with a deadline, then Small Claims Court if needed — all while watching the limitation clock, which in most provinces gives you two years from default to sue. Each step protects the relationship better than silence followed by a lawsuit.
The money stopped coming back, the subject went quiet, and now you're wondering whether you've simply lost it. You probably haven't — not yet. There's a clear, escalating path from a calm reminder all the way to Small Claims Court, and one deadline you can't afford to ignore. Here's the realistic sequence, step by step.
When repayment stops and the conversation gets awkward, it can feel like there's nothing to do but absorb the loss. There's actually a clear, escalating path — and most of it never reaches a courtroom. The goal at every step is the same: stay calm, keep a record, and give the borrower an easy, dignified way to do the right thing.
- A clear, calm written reminder. Start with a short message — text or email — stating the amount, when you lent it, and a specific ask: "Can we set up a repayment plan starting next month?" Writing it down does two jobs at once: it nudges payment, and it creates a dated record. If the borrower replies "I'll pay you back soon," you've just captured an acknowledgement of the debt.
- A formal demand. If the reminder goes unanswered, send a firmer demand letter. It doesn't need legalese — just the amount owed, a clear deadline, and a plain statement that you'll pursue the matter in Small Claims Court if it isn't resolved. The shift in tone, and the fact that it's now obviously documented, is often what prompts payment.
- Small Claims Court. If demands fail, Small Claims Court is the realistic venue for most family loans. It's built to be navigated without a lawyer. You'll file a claim, pay a modest fee, and present your evidence — the transfer records, the messages, the demand letter. Bring proof the money moved and proof it was understood as a loan.
Mind the clock
Every province sets a limitation period — commonly two years — after which a debt claim can be barred. It generally runs from when repayment was due, or from the last time the borrower acknowledged owing the money. Don't let years drift by hoping it resolves itself: a claim that's perfectly valid today can become unenforceable simply because the deadline passed. Conversely, a written acknowledgement or a partial payment can reset that clock in your favour.
The tax question — and a common misconception
People sometimes assume an unpaid family loan can at least be claimed as a loss on their taxes. For an ordinary personal loan, it generally can't. The Canada Revenue Agency does not allow a capital loss on personal-use debt, and a typical "help-out" loan to a relative is exactly that. The narrow exceptions — bona fide loans made to earn income, or an allowable business investment loss on debt owed by a small business corporation — rarely fit a family situation. The practical takeaway: your path to being made whole is recovery, not a write-off, which makes the steps above all the more worth following.
The lesson for next time
Almost every loan that ends up in court shares one feature: nothing was written down at the start. The single habit that prevents this is putting the loan in writing before the money moves — the amount, the repayment terms, and a clear line that it's a loan, not a gift, signed by both people. It can still be warm and flexible. What it can't be is invisible, because invisible is exactly what turns a simple debt into a dispute about whether a debt ever existed.
Common questions
What's the first thing to do when family won't repay a loan?
Send a calm, written reminder — a text or email is enough. Keep it factual: the amount, the date you lent it, and a specific request to arrange repayment. Beyond nudging payment, a written message creates a dated record and can prompt the borrower to acknowledge the debt, which is valuable evidence if you ever need it.
Do I need a lawyer to recover a family loan?
Usually not, for typical amounts. Small Claims Court is designed to be used without a lawyer, and most family loans fall within its limit. A lawyer or licensed paralegal becomes worth considering for larger sums, contested facts, or if the borrower has hired their own representation.
How long do I have to sue over an unpaid loan?
There's a limitation period — commonly two years in most provinces — and it generally runs from when repayment was due or last acknowledged. Miss it and the claim can be barred entirely. A part-payment or a written acknowledgement of the debt can restart that clock, which is one more reason to keep the conversation in writing.
Can I claim a tax loss if a family member never repays?
Generally no. An ordinary personal loan to a relative that goes bad is not deductible — there's no capital loss for personal-use debts. Narrow exceptions exist for bona fide loans made to earn income or to a small business corporation, but a typical family loan doesn't qualify. Treat recovery, not a tax write-off, as your route to getting whole.
Never chase a loan blind again
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Create my loan agreement →General information for Canada, not legal advice; LendRight is not a law firm. Limitation periods, Small Claims Court limits and procedure vary by province, and tax treatment of bad debts is fact-specific. For your own situation, consult a licensed paralegal, lawyer, or tax professional.
We write plain-language guides on lending between family and friends in Canada, reviewed against current provincial and CRA rules. LendRight is not a law firm — this is general information, not legal advice.