A thorny issue that regularly crops up when resolving finances in divorce cases is how to treat family loans. It is common for parents and family members to give money to help a child, or young couple, on their path to marital enlightenment. What happens, however, when the light dims, the pennies are counted, and mum and dad want repaying?
Hard and Soft Family Loans
In simple terms, family loans are either perceived as hard or soft. If hard, they are likely to need repaying; if soft, repayment is less likely or unlikely. The reason that clarification on the type of loan is necessary is because mislabelling a family loan can be an underhand way to move money out of an asset base within divorce. A common scenario is a couple having, say, £100,000 equity to divide between them before one claims his or her mum and dad are owed back the £25,000 deposit. So, do the couple now have £100,000 to share, or £75,000? Might the actual end result be £37,500 to one party and £62,500 to the other? The opportunity is ripe for distortion.
P v Q 2022 EWFC B9 recently addressed the issue of family loans. Here, the husband unilaterally paid his mother £150,000 from marital monies claiming he was repaying a loan. The wife objected, claiming he was trying to deprive her of marital money. The husband’s mother explained in court that she had loaned her son £150,000, but accepted that she had not pressed for repayment and intended to adjust her Will to favour the husband’s siblings if the monies were not returned. The court held that this was a soft loan and the £150,000 should be added back onto the marital balance sheet.
Identifying Hard Loans
Helpful guidance was offered for identifying hard loans: “Factors which on their own or in combination point the judge towards the conclusion that an obligation is in the category of a hard obligation include (1) the fact that it is an obligation to a finance company; (2) that the terms of the obligation have the feel of a normal commercial arrangement; (3) that the obligation arises out of a written agreement; (4) that there is a written demand for payment, a threat of litigation or actual litigation or actual or consequent intervention in the financial remedies proceedings; (5) that there has not been a delay in enforcing the obligation; and (6) that the amount of money is such that it would be less likely for a creditor to be likely to waive the obligation either wholly or partly”.
Identifying Soft Loans
Guidance was also offered in respect of soft loans: “Factors which may on their own or in combination point the judge towards the conclusion that an obligation is in the category of soft include: (1) it is an obligation to a friend or family member with whom the debtor remains on good terms and who is unlikely to want the debtor to suffer hardship; (2) the obligation arose informally and the terms of the obligation do not have the feel of a normal commercial arrangement; (3) there has been no written demand for payment despite the due date having passed; (4) there has been a delay in enforcing the obligation; or (5) the amount of money is such that it would be more likely for the creditor to be likely to waive the obligation either wholly or partly, albeit that the amount of money involved is not necessarily decisive, and there are examples in the authorities of large amounts of money being treated as being soft obligations”.
At the point of advancing money, or in the later event of dispute, evidence of any kind is helpful - contemporaneous texts, messages, letters, documents and emails all help with understanding genuine intentions at the time. Language is also important: “gift” and “loan” mean very different things. For family members loaning money and genuinely expecting repayment, a formal loan agreement would be a very wise investment. Put more simply, if you are giving paper, make sure you get paper.
