Family loans in financial remedy proceedings
Financial settlement negotiations following divorce begin with both parties declaring all their assets and liabilities to each other. This is to establish what the matrimonial assets are and how much is in the matrimonial pot.
During this process loans will need to be included as part of financial disclosure. Loans from family members are becoming increasingly popular and careful consideration must be given to these during financial remedy proceedings.
Some parties often try to argue that loans between family members, usually referred to as ‘soft loans’ are not enforceable. Typically, a soft loan does not include a written agreement and has reasonable prospects of its repayment being waived. On the contrary, a hard loan usually involves a written agreement or contract and failure to repay this type of loan will often incur interest and other financial penalties.
The recent case of P V Q  provided some clarity on the courts’ view of hard and soft loans within family law.
During this case, disputes had arisen between the parties as to loans between family members. His Honour Judge Hess had to consider whether the loans should be considered gifts, soft loans or hard loans. In this case, HHJ Hess concluded that:
“Once a judge has decided that a contractually binding obligation by a party to the marriage towards a third party exists, the court may properly wish to go on to consider whether the obligation is in the category of a hard obligation or loan, in which case it should appear on the judges’ computation table, or it is in the category of a soft obligation or loan, in which case the judge may decide as an exercise of discretion to leave it out of the computation table.”
This judgement means that soft loans are much less likely to be paid for using funds from the matrimonial pot as they are not usually considered a bona fide liability of the person who borrowed the monies.
If a party receives money from a family member, with the intention that repayment will take place in full, it is advised that this should be documented in a properly drawn up written agreement. This ensures that such a loan will be considered by the court, and that it is properly factored into the decision-making process. Soft loans, on the other hand, are very much at the discretion of the court as to how they are considered and dealt with, if indeed at all.
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