Many people borrow money from family members, and such loans feature regularly in divorce and financial remedy cases. How these ‘family loans’ should be factored into the divorce settlement can be contentious, and will depend on the nature of the loan.
Within financial remedy proceedings, lawyers often describe loans as being ‘soft’ or ‘hard’. A soft loan is a loan where there is no – or no immediate – expectation of repayment, or where there will not be a significant consequence to repayment being delayed or indefinitely postponed. A hard loan is a loan that must be repaid within a set time frame.
Clearly, a mortgage, or loan from a bank, is a hard loan. The nature of a loan from family can be harder to identify and will depend on the circumstances, but it may be considered soft. If the loan is substantial, whether it is considered ‘hard’ or ‘soft’ may affect the range of settlement options which are considered fair and/or affordable, and so this can become an important issue.
It may be alleged that the loan was never a loan at all, but a gift, and so does not need to be repaid. The court will look at all the circumstances and the available evidence to determine whether a payment was a loan or a gift.
The more evidence there is supporting the existence of a loan, the more likely it is that a payment will be regarded as having been a loan. Some key questions to think about are;
- Was a loan agreement entered into at the time the funds were provided?
- Are there text messages, emails or other contemporaneous documents concerning the transfer which may shed light on its nature?
- Was a loan agreement made after the funds were provided, and if so in what circumstances?
- Have there been other transfers between the ‘lender’ and ‘borrower’ in the past which have been repaid, which might indicate that transactions between the parties tend to be loans?
- Is interest being requested or paid?
The circumstances are also important, for example, if the funds were provided by a parent, the nature of the relationship may make it less likely that the funds were a loan, compared to a payment from a cousin or more distant family member. However, family relationships and attitudes to financial arrangements vary greatly, and much will depend on the context of the specific family.
If the existence of a loan is recognised, the next question is whether the loan is ‘hard’ or ‘soft’. Again, much will depend on the individual facts of the case and the available evidence, both in respect of the specific payment and any past practice.
Many people consider borrowing money from family to help with living costs or legal fees during the divorce proceedings. Given that debate may well arise as to whether and how family loans should be taken into account in financial remedy proceedings, some choose to pursue other options such as bank loans, credit cards, specialist litigation loans or seeking interim financial provision from their spouse – but these are likely to come with increased costs.
Where a loan from family is the best option, it would be wise to enter into a formal loan agreement creating a contractual relationship to ensure there is documentary evidence reflecting the intention behind the loan. It should be clear on the terms of the loan, such as whether interest is payable, whether security is to be provided and when repayment is due. It is important, however, not to mislead the court or your spouse – if a payment presented as a loan is never repaid and in fact treated as a gift, that could provide a basis for subsequently re-opening the case.
Ultimately, the court will seek to ascertain the reality behind any payments from family members, so that a fair award can be made reflecting the parties’ true financial circumstances.
If you have any questions about family loans or other aspects of family law please contact Eri Horrocks on 020 7412 0050 or Eri.Horrocks@hunterslaw.com.