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How Are Family Loans Treated In Divorce?

With interest rates at their highest levels for years, more people may turn to personal loans from friends and family as opposed to formal loans from banks. These agreements are often informal with little thought given to the terms for repaying the loans.  So how are family loans treated on divorce?

When finances are under strain, people may look to family and friends for financial assistance with, for example, purchasing a house or paying legal costs in divorce proceedings. If available, this route can be quicker and more affordable than obtaining a loan from a financial institution.

In financial remedy proceedings, it is not unusual to find one party insisting that the advancement of money from one spouse’s parent, relative or friend should be repaid (and therefore included as a liability on the asset schedule), and the other insisting that it was, in fact, a gift that will not require repayment. In some circumstances, it can have a significant impact on the overall outcome. But how do the courts deal with this?

In a 2022 case [1] a judge provided helpful guidance on how the advancement of money from family members (and others alike) should be treated in the overall financial division in financial remedy proceedings.

Gift or Loan?

The court will first look to establish whether or not the advancement of money should be considered a ‘gift’ or a ‘loan’. Generally, for the court to determine the advancement of money to be a gift, there must be evidence of an intention to give. If no such evidence exists, then the court will likely find that there is a loan.

Hard or Soft?

Having determined that there is a technically enforceable obligation between a party to the proceedings and a third party (for these purposes, a parent), the court will go on to consider whether the loan should be categorised as a hard or soft loan. The significance of this is that if it is a hard loan, consideration will be given to the fact that it will need to be repaid when the court is determining the appropriate division of finances. However, if it is a soft loan, the court may use their discretion and leave it out of the computation table.

Helpfully, the judge in the 2022 case referred to above set out a list (albeit non-exhaustive) of factors that might indicate whether a loan is ‘hard’ or ‘soft’. They are set out below:

Factors that point to a hard loan:

  • It is an obligation to a finance company.
  • The terms of the loan have the feel of a normal commercial arrangement.
  • The obligation arises out of a written agreement.
  • There is a written demand for payment, a threat of litigation or actual litigation or actual or consequent intervention in the financial remedies proceedings.
  • There has not been a delay in enforcing the obligation.
  • 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.

Factors that point to a soft loan:

  • 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.
  • The obligation arose informally and the terms of the obligation do not have the feel of a normal commercial arrangement.
  • There has been no written demand for payment despite the due date having passed.
  • There has been a delay in enforcing the obligation.
  • 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).

Ultimately, each case will turn on its own facts and the guidance above is not intended to be exhaustive. It serves as a reminder that loans from family members can be scrutinised within the context of financial remedy proceedings. Family members should consider carefully the basis on which they are making or receiving a loan and understand that it would be prudent to ensure that any loan is made in a written agreement with commercial terms and repayment obligations are met.

[1] P v Q [2022] EWHC B9


DISCLAIMER: This publication is not intended to provide a comprehensive statement of the law and does not constitute legal advice and should not be considered as such. It is intended to highlight some issues current at the date of its preparation. Specific advice should always be taken in order to take account of individual circumstances and no person reading this article is regarded as a client of this firm in respect of any of its contents. 

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Samantha Fletcher
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