Loans from family and friends
The loans to or from family and friends are often informal. They are generally unrecorded and rely on the trust and relationship between the family members involved.
Examples of such loans include:
Where parents help their child and their partner buy their first home
Where siblings help each other out for short term emergency loans
Where parents lend money to a child to assist them with legal fees
Where members of family invest in a new business established by a member of the family.
Is it a loan or a gift?
Where the debts of the parties include an unsecured debt owed to family members, the Family Court may sometimes disregard the debt in the division of net assets in a property settlement.
Unless there was a formal loan agreement in place with a detailed repayment schedule, loans from family, especially those from parents to their child, are generally considered as gifts.
This means even though you may have legitimately incurred a debt, you may have to carry the debt personally and repay the loan from your eventual share of net assets or your personal income.
What to do if you need to loan money before settlement
If you need to borrow from family or a third party for any reason before settlement is agreed, it's advisable to enter into a legally binding loan agreement with the lender.
Take advice to draw up a formal agreement stating the date of the loan, who the money was lent to, lent by, and for what purpose. Be specific about any security offered and the repayment terms. All parties should sign the loan document in front of a witness.
Following these guidelines will put you in a better position to submit the document as a genuine liability when you draw up your joint schedule of assets and liabilities for property settlement.
Example of a Loan Agreement:
Loan Agreement Template
What to do if loans already exist
If you have existing loans from family or friends and you are considering separation, you should arrange to have the loan terms documented if this has not already been done.
This will not guarantee the loan will be admitted to the property pool but it will increase the chances of proving the existence of a debt with documented terms.
If you are a parent who has genuinely not gifted but has loaned money to a child whom you are concerned may be heading for a property settlement, you are advised to formalise and document the terms of your arrangement, with all parties who have received the benefit of the loan and are responsible for repayment.
If the repayment terms lapse or have not been met, as the lender, be sure to follow up with a demand in writing or formal offer to restructure a new agreement. Failure by the lender to demand repayment when terms are not met is detrimental to proving the legitimacy of this type of loan.
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The information in this article is general in nature and should not be considered as legal advice. You should seek the advice of a registered professional who will be able to appropriately assess your specific circumstances before offering their expert opinion.