When assessing how a loan will be considered in a financial settlement, we must determine whether the loan is a ‘hard’ or ‘soft’ loan. A ‘hard loan’ is where a party borrows money with a legal obligation to repay it. This is usually easy to determine where the loan is with a bank or other commercial lender. A ‘soft loan’ is repayment of money on lenient terms. Whilst there is no strict rule to determine which category a loan may fall into, there is certain criteria that can offer guidance to help with this.
If the party’s obligation is to a finance company, rather than an individual, and the terms of the agreement appear to be that of a commercial nature, this may be considered a ‘hard loan’, especially where the terms are documented in writing. Other factors which may help to determine the existence of a ‘hard loan’ is where there is evidence of a written demand for payment, or the threat of litigation for not repaying the money. If enforcement has commenced without delay, this will also be an indication of a ‘hard loan’. Although the amount of the loan isn’t a decisive factor, if the amount would be as such that a creditor would be less likely to waive the obligation, this will imply a ‘hard loan’.
If a liability appears to be a ‘hard loan’, this must be factored in when evaluating the finances of the parties and the liability may be deducted from the available resources.
Alternatively, where the party’s obligation is to a friend or relative, this may suggest a ‘soft loan’. Other considerations would be where the agreement is not documented in writing, or if it is, that agreement may be of an informal nature. Although the amount of borrowing may be a consideration, large amounts of money may still be considered a ‘soft loan’.
Where there appears to be a ‘soft loan’, there is discretion to ignore such a liability entirely. In practice this would mean that the loan amount would be retained as part of the liabilities of the party who borrowed it and not impact the assets available for sharing, even where this loan has already been repaid.
If a Court is called upon to determine a financial settlement and there is an issue as to what liabilities are relevant, additional evidence to determine such matters including creditors coming to Court to be cross examined and joining family members in to proceedings, may result. This can become very costly and an unpleasant experience for all involved.
In modern times, money is often borrowed from family members by couples who want to buy property or have a certain type of wedding. Even providing for grandchildren can mean that money is borrowed from a couple’s parents.
Although conversations about money can be difficult, it is really important that everyone involved understands the basis upon which money is being provided. If there is nothing other than a conversation between two people, it may be impossible to determine that a loan has been made. In such circumstances, the result may be that more money is shared between a divorcing couple than was originally intended.
Wherever possible, when choosing to borrow money from friends or family, for everyone’s protection, it is crucial that any decisions around that money are recorded in writing. Ideally, such a written record needs to say how much is being provided and on what terms. Is it going to be paid back and if so, what are the expectations around the return of the money? Will it be subject to interest payments? It doesn’t have to be, although if that is the expectation, the agreement should say. The more detail that can be offered in writing, the easier it is to understand what the intentions were when the money was made available.
Every person who may have a liability to return the money needs to sign the agreement to say that they understand the terms upon which the money is made available. Often, it is better to have legal advice for all concerned. Whilst this may seem an expensive exercise, it can save a lot of money in any later dispute, particularly if one or more party to the agreement ends up in a dispute such as divorce.
As with all issues arising from divorce or relationship breakdown, taking tailored legal advice early on can assist in resolving any issues, quickly and cost effectively. Similarly, being prepared to attend Family Mediation with an Accredited Family Mediator, can ensure that settlements are arrived at without delay and the need to incur heavy costs in litigation.
At Band Hatton Button, our lawyers are all members of Resolution – First for Family Law and as a result will help you resolve matters in a conciliatory way. We also have an Accredited Family Mediator who can assist with all types of Family Mediation.
Ruth Hayfield – Paralegal – Family Team