An area of dispute that often occurs between parties during financial remedy proceedings is the consideration of a debt owed to a friend or family member. Quite often, one party will claim that monies given by a friend or family are an existing debt to be repaid and should appear as a liability on the asset schedule, whilst the other party will claim that monies given by a friend or family member are simply a gift or loan that does not need to be repaid, and therefore no consideration of it is needed. This issue is becoming more frequent especially in cases involving the “bank of mum and dad” who may contribute financially towards a deposit on a property, or friends or family assisting with a party’s legal fees.
It is important to establish the existence of a debt and the probability of repayment as the court are required to have consideration of the current financial resources of a party and what it is likely to be in future. To determine this the court must identify the assets of the marriage, the total value of the assets and then how to distribute the assets between the parties, keeping in mind the section 25 of the Matrimonial Causes Act 1973 criteria and needs of the parties. Therefore, to reach a fair division of assets, the court must be aware of the parties’ liabilities, including those debts to be repaid. Where a debt is proven to exist, for example there is a clear paper trail of money being transferred and subsequently used, the next task is to consider if the debt constitutes a hard or soft loan and the need to be repaid.
In the fairly recent case of P v Q (Financial Remedies) [2022] EWFC B9, Hess HJ considered this issue at a final hearing and rather helpfully set out the characteristics in relation to hard and soft loans.
Hard loans tend to be an obligation to a financial company such as a bank or commercial lender, and in which the terms of the agreement have the feel and consequences of a usual commercial agreement. The agreement is set out in writing, with clear repayment terms and interest to be incurred. These agreements are usually with a third party that would not delay in enforcing the terms should payment be delayed, often involving a threat of litigation or invention. Hard loans are usually considered debt that must be repaid, and therefore should appear as a debt on the relevant party’s asset schedule.
Soft loans, however are usually obligations to friends or family, where the debtor remains on good terms with a party and is unlikely to want them to suffer any financial hardship in the event that the loan is not repaid and so enforcement is unlikely. These loans are usually informal and not in writing with no clear terms of repayment or interest to be added, and usually no demands for repayment are made. That is not to say that loans from friends and family will always be considered soft loans, in these cases it important that a party discloses the debt as soon as possible and evidences any financial history between themself and the family member or friend as evidence for why it should be considered a loan to be repaid. In reality a main factor to determine if a loan is a hard or soft loan is the enforceability of the debt.
How can friends and family protect their loans?
When obtained a loan from a friend or family member, it is advisable to have a clear written contract drafted showing a clear intention for the reason for the loan, and repayment terms. If a party is being lent a substantial amount of money towards a deposit for a property, for example, the parties can enter into a declaration of trust, setting out the third-party financial interest in the property.
A third party who claim to have loaned money, for example the deposit towards a property, can seek to be added as an intervenor into the proceedings. However, this is a high-risk option and must be proceeded with caution. Proceedings involving intervenors often being costly and lengthily and can have substantial cost implications.
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