You’re already giving your parents a nice financial “thanks” — whether you continue being flexible on the repayment schedule or you forgive this debt altogether. Since your parents are close to retirement, this is a good opportunity to talk with them about where they stand financially. From there, you can make decisions about how much (if any) you want them to repay you.
Personally, I’d be more inclined to forgive the $21,000 loan you made to help your parents get back on their feet than the $11,000 they borrowed for your dad’s sports car. I’d also be nervous about their spending habits knowing that your dad bought a sports car so soon after filing for bankruptcy.
One option would be to ask your parents to sign a promissory note with very generous terms. Since you don’t need the money, you could ask that they agree to repay you a small amount — say $50 or $100 a month — and charge them zero interest. I’m guessing you’re not going to sue your parents if they fail to make payments.
But putting the agreement in writing makes it a bit more formal, plus it helps you make the point that you’re not a human ATM. By allowing them to make small payments, they can avoid the tax consequences of withdrawing $28,000 of retirement money in a lump sum.
If you’d prefer to make this a one-time gift, be sure to communicate to your parents what you’ve told me: You really don’t need this money. This is a small expression of gratitude.
As far as future requests, I think you need to be honest about your willingness to help out. If you’re not willing to lend your parents money in the future, tell them that now, i.e., before they come to you asking for another loan. That doesn’t mean they won’t ask again, of course. But at least you’re managing the expectation upfront.
If you and your parents agree on a repayment schedule, consider the likelihood that they’ll need money in the future. Many adult children do wind up providing some financial support to their parents in their later years. If you think you may need to do so eventually, consider putting the money they repay into a separate bank account that you’ve earmarked for this purpose. You don’t need to tell your parents you’re doing so. But at least you’d avoid the taxes and early withdrawal penalties you could face if you put the money in a retirement account, only to withdraw it again.
Ultimately, this is a good problem to have. Your parents are lucky to have such a generous child.
You followed the golden rule of lending money to family, which is that you should never do it unless you can afford to make it a gift. However you proceed, be sure to tell them your flexibility is your way of saying, “Thanks for being so great.”