Getting divorced and dividing your finances can be very expensive, particularly if you go through the court process, and you may not be able to afford the up-front litigation costs. You might therefore look to family members or friends to support you and here are some things you should know. Should my family/friend help fund my divorce? Here is what you need to know.
Loans from family and friends are not automatically included in a schedule of assets and are therefore not automatically repaid before any division of assets from the ‘matrimonial pot’. The court will instead look at whether there is in fact a contractually binding obligation to repay a loan and then look at whether the loan is ‘hard’ or ‘soft’. If the loan is classified as soft, the judge will have a discretion as to whether this should be included in the final division.
The Family Court in P v Q  EWFC B9 gave the following list of indicators for hard and soft loans.
- obligations to a finance company
- terms of the obligation have the feel of a normal commercial arrangement
- the obligation arises out of a written agreement
- there is a written demand for payment/threat of litigation/actual litigation or intervention in financial remedy proceedings (enforcement intention)
- there has been no delay in enforcing the obligation
- the amount of money is such it would be less likely for a creditor to waive the obligation in full or part.
- obligation is to a friend or family member with whom the debtor remains on good terms and 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 in part – albeit the amount is not necessarily decisive
Reading the above, you may decide to take out a commercial loan rather than borrowing from a friend or family member, but you need to make the right decision for you and there may be other factors that influence this. For example, there may be high interest rates on a commercial loan and penalties if you are unable to repay it on time in case the divorce is not finalised by then. You may want/need the flexibility of a loan from a parent and feel comfortable knowing it will not be enforced immediately/at all. Or you might feel comfortable that you have formalised the loan from your friend sufficiently that you hope the judge will take it into consideration.
The above doesn’t just apply to loans taken out to fund litigation but also to loans that are outstanding at the time of the divorce. In the case of P v Q  EWFC B9 (above), the wife had a €30,000 loan from her father to fund her MBA 15 years prior to the divorce. A document recorded the loan at the time and it was recorded as an interest free loan without a date for repayment. The wife was to repay the loan at her discretion and no demand for repayment was made. The loan was also not in the wife’s Form E or statement to the court.
The husband also received a loan; £150,000 from his mother 9 years prior to the divorce. The loan was to assist with housing costs and the mother had advanced this amount to all her children. This was an informal arrangement without any documentation. After the parties’ separation, the husband paid his mother £150,000 in purported repayment of the loan.
The Judge found in both cases that these were soft loans and therefore, did not include the wife’s loan on the balance sheet and attributed back the £150,000 paid to the husband’s mother to his side of the balance sheet. The issue of loan repayment is a very common feature in the cases we deal with. If you would like help to formalise a loan agreement or would like advice about existing loans now that you are getting a divorce – contact us today.
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