In financial matters arising from divorce proceedings, the issue of “loans” often arise. It is common for money to move between family members for a variety of reasons, whether that is to help with debts, contribute to a house deposit or home improvement or to help set up a new business.
When a marriage comes to an end, understanding the nature of these loans is crucial and the Court makes clear definitions between gifts, loans and other assets.
The Court will often be asked to determine whether loans from family or friends are categorised as ‘hard loans’ or ‘soft loans’.
A hard loan is more akin to a mortgage, for example, with clear repayment terms in writing, perhaps with interest being charged. They will often include legally binding documents with procedures for enforcement, if repayments are not made.
A soft loan is more akin to an informal arrangement without specific terms of repayment. Soft loans may often be made by parents to children with terms such as “pay me back when you can”. If repayments are not made, the Court will consider the likelihood of a parent enforcing repayment against their children.
Impact on divorce settlements
In the context of divorce, distinguishing between a hard loan, soft loan, or outright gift is critical. When dividing marital assets, a court will typically consider all financial assets, including any loans. However, the type of loan can influence whether it’s viewed as a debt to be repaid or as part of the marital estate.
If a loan is judged to be a hard loan, then the Court is likely to consider it a legitimate debt, prioritising payment and determining that it must be repaid before dividing any remaining assets. A soft loan is likely to be disregarded, not considered a genuine liability and reduced from the assets available.
How to protect family loans
If you are considering lending money to a family member it would be wise to consider setting formal terms and having them recorded in a signed loan agreement setting out the terms for repayment. Taking such steps are likely to mean that the loan is treated as a legitimate debt should a future divorce or separation occur.