During divorce, it’s important to understand how family loans are treated in divorce proceedings. It is not uncommon in a divorce to find that family members or friends have advanced monies during a marriage (whether to the couple jointly or to one of them) and in some cases post-separation to help with the payment of legal fees.
It is also not uncommon to find that when it comes to deciding what needs to be taken into account in the financial division the couple will have differing views on whether the family assistance was a gift or a loan.
How does the court deal with family loans in divorce proceedings
How then does the court approach such a dispute? Section 25 of the Matrimonial Causes Act 1973 contains the statutory factors the court must apply to determine how the income and assets of the parties are distributed on a divorce. Section 25(2)(a) and (b) require the court to consider the ‘income, earning capacity, property and other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future’ as well as the ‘financial needs, obligations and responsibilities which each party to the marriage has or is likely to have in the foreseeable future’. The court will therefore need to consider the parties liabilities when deciding what orders to make.
In all cases the court will have a schedule prepared by the parties’ lawyers summarising the parties’ incomes, assets, and any liabilities. In some instances, the existence of a loan is not in dispute but instead the dispute will focus on whether there is a ‘hard’ loan (and should appear on the court’s asset schedule) or a ‘soft’ loan (in which case the judge may exercise their discretion and leave it out).
The party asserting the existence of aa loan will need to produce evidence of the loan. The court will not only look at the terms of the loan in dispute but will also look at the history of financial assistance given by family members. If there is a history of sums being advanced and not repaid it is likely that the court will consider it a gift or very soft loan, whereas if there is a history of loans being made and repaid, they are likely to be treated as a hard loan.
In some instances, it may be appropriate for the ‘lender’ to be joined as a party to the proceedings. Alternatively, the lender may be given permission to file a witness statement. Careful consideration should be given before joining a lender to the proceedings as it will usually result in a significant increase in legal costs and the risk of cost orders being made.
If a loan makes it into the asset schedule it doesn’t necessarily mean that the court will make provision for the immediate repayment of the loan. If the assets are needed to meet the needs of the parties and their children, the repayment of a soft loan will not be given priority and will often be treated as a sum to be repaid if and when resources permit.
How will the court distinguish between a hard and soft loan?
In P v Q (Financial Remedies) [2022] EWFC B9, HHJ Hess outlined a non-exhaustive list of factors for consideration when determining whether monies advanced to a spouse in financial remedy proceedings should be regarded as a gift or loan.
Factors which on their own or in combination point a judge to a conclusion that an obligation is in the category of a hard loan are:
- Obligations to a finance company which have the feel of a normal commercial arrangement and arising out of a written arrangement.
- There is a written demand for payment, threat of litigation or actual litigation, or actual or consequent intervention in the financial remedy proceedings.
- If there has not been a delay in enforcing the obligation and the amount of money is such that it is less likely for a creditor to waive the obligation in whole or in part.
Factors which may on their own or in combination point the judge to a conclusion that an obligation is in the category of a soft loan include:
- Circumstances where the obligation is to a friend of family member with who the debtor remains on good terms and who is unlikely to want the debtor to suffer hardship.
- The obligation has arisen informally and there has been no written demand for payment despite the due date having passed.
- There has been a delay in enforcing the obligation and the amount of money is such that it would be more likely for the creditor to waive the obligation in whole or in part, albeit that the amount of money involved is not necessarily decisive.
How Watson Morris can help
If you’re trying to understand how family loads are treated in divorce or if you are separated and contemplating borrowing from friends or family take legal advice on how the advancement of those funds are likely to be treated in your divorce.
Ensure any loans are formally documented in writing and clear repayment and interest terms agreed before any funds are advanced. Also consider using alternative forms of borrowing, such as commercial loans or litigation funding. For a detailed overview of the options, you can use to fund legal fees see our guide to funding legal fees.
We understand accessing funds may be difficult if assets are tied up, or income streams are for whatever reason inaccessible and that having to fund legal fees can be a worry and add to the pressure at an already stressful time.
Written by Caroline Watson
October 15, 2022
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