When it comes to money, prioritizing your own financial security is paramount. That means when funds are tight, you might have to make some difficult decisions on where to cut back — which might include backing out of a financial commitment you’ve made.
Maybe you promised a friend you’d lend them some cash or you applied for a loan you can no longer afford to take. Either way, the bottom line is, it’s more important to ensure you can manage your essential expenses than to keep your word.
Still, that doesn’t make it less difficult to go back on your commitment — especially if there are legal obligations or complex family relationships involved.
Read on to learn more about navigating the tricky waters of backing out of a financial commitment.
Different Kinds of Financial Commitments — And the Consequences of Reneging
One important thing to note about backing out of a financial commitment is that the results of doing so will vary significantly based on your legal obligations, if any.
A promise to a friend or family member comes with complicated emotional consequences, but a contract with a lender could affect your credit score or your assets if you aren’t careful.
Family Commitments
“Backing out of a financial commitment is a tough situation. It gets even more complicated if it is a family member who has helped you out in the past,” Bobbi Rebell, certified financial planner, founder of the website Financial Wellness Strategies and author of “Launching Financial Grownups,” said in an email.
More than likely, if you’ve promised a friend or family member that you’d help them out financially, you aren’t tied to any contract or legal obligation. However, backing out will have more damning relationship consequences than with a stranger. The stakes are even higher if you owe them money and can’t repay it in the agreed upon time.
[How to Borrow Money from Friends and Family]
According to Rebell, it’s important to approach these situations carefully if you want to maintain the relationship.
“The truth will be painful, but avoiding it by ‘ghosting’ the relative or friend is even worse. Get in front of the situation by scheduling a time to talk to them. Explain why you can’t meet your obligation and have a list of options for them,” she said.
Legal Commitments
If you’ve agreed to pay back a loan or similar sort of financial agreement with a bank or financial institution, backing out gets a little tricker. You probably signed a contract when you accepted the money, so you have a legal obligation to pay it back. If you don’t, the lender could seize your assets or you could suffer a big hit to your credit score.
[Read: What Happens if You Don’t Pay Your Debts?]
The actual obligation will depend on the lender and the details of your agreement, Rebell said.
“With a traditional lender it may come down to the fine print, and how flexible the lender chooses to be with you. Again, getting in front of the situation will be helpful. First, read all the paperwork and know what your worst case scenario is. Be prepared for the lender to stick to whatever you signed,” she said.
Philanthropic Commitments
If you’ve pledged money to a charity, it can feel bad to have to back out.
“Many of us want to support causes we care about, as well as those that are important to our friends and family. With the best of intentions, we are often more generous than we can afford,” Rebell said.
In the end though, there are no real consequences if you back out — other than, perhaps, guilt.
[Read: Top 5 Donation Sites and How to Budget for Charitable Giving]
“The truth is no one knows our financial ability to give to charity, and we don’t owe them an explanation as to why we aren’t giving more,” Rebell said.
Steps for Backing Out of a Financial Commitment
Once you decide you need to renege on your financial commitment, follow these steps:
1. Identify legal obligation and consequences of backing out. If your financial commitment is with a lender, start by reading any contracts and identifying potential consequences. Did you put up collateral that could be seized? Will a default on payment be reported to credit bureaus? Knowing the stakes can help you make a plan.
2. Prepare your case thoroughly. Before discussing your situation with your lender or family member, document why you need to back out of your commitment. Depending on who you’re speaking to, you might want to provide more or less information about what funds you have available and why money is tight.
3. Schedule a time to discuss the situation. Rebell warns against bringing up this kind of conversation out of the blue. “Schedule a time to discuss so that all parties can be focused,” she said.
4. Consider a compromise. In many cases, you’ll need to come to a compromise rather than back out of your commitment entirely. With a lender, that might mean agreeing to a payment plan or requesting a lower interest rate. With a friend or family member, you might set up some alternative form of payment, like helping out with child care, Rebell said.
Throughout the process, it’s critical to show that you made a good faith effort to honor your commitment and are willing to take steps to reduce the burden on the other party. Remaining amicable throughout discussions lowers the chance of legal retaliation or damaging an interpersonal relationship.
Don’t Forget the Emotional Consequences
Even if you come to a solution — whether it’s backing out of your commitment entirely or reaching a compromise — don’t forget to prioritize your emotional and mental health alongside your financial health.
And if the process impacts someone you care about, remember to consider their emotional response as well.
“Let them know that you are sorry and that the shortfall was not intentional. Create a plan with them for some kind of resolution. Try to find ways to help them with the resources that you do have,” Rebell said.
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How to Back Out of a Financial Commitment originally appeared on usnews.com
