How the bank of mum and dad can impact on divorce

Rebecca Meehan, solicitor in our family team, reflects on how family members and close friends lending money to parties either during or before marriage, could potentially unexpectedly impact their child’s future divorce settlement.

It is common that the most substantial asset in a marriage is the family home. In a world where the property ladder is arguably far more difficult to jump onto than it was historically, we regularly see significant sums of money having been received by parties from their parents to enable them to purchase a property. This, in turn, can leave parties, or their parents, being somewhat disillusioned at the time of divorce in the thinking that any monies gifted or even loaned are intrinsically safe from a claim by the ex-partner.

It is first important to determine whether any funds advanced were intended to be a loan or a gift. The general principle for an advance of money to be classed as a gift is that there needs to be an intention to give. If it is established that monies contributed were intended to be a loan, it is then important that the court decide whether that loan should be classed as ‘hard’ or ‘soft’. The recent case of P v Q (Financial Remedies) [2022] EWFC B9 provides some important guidance on this point.  The Judge in this case considered previous case law dealing with hard and soft debts to be an ‘elusive topic to nail down’.

Considerations for monies to be classed as a hard loan, and thus included by the court as an asset that should be repaid to the third party and excluded from the matrimonial pot, are as follows;

1. The fact that it is an obligation to a finance company;
2. That the terms of the obligation have the feel of a normal commercial arrangement;
3. That the obligation arises out of a written agreement;
4. That there is a written demand for payment, a threat of litigation or actual litigation or actual or consequent intervention in the financial remedies proceedings;
5. That there has not been a delay in enforcing the obligation; and
6. That the amount of money is such that it would be less likely for a creditor to be likely to waive the obligation either wholly or partly.

On the contrary, factors which may on their own or in combination point towards the conclusion that an obligation is soft and therefore unlikely that a repayment would be required as follows:

1. It is an obligation to a friend or family member with whom the debtor remains on good terms and who is unlikely to want the debtor to suffer hardship;
2. The obligation arose informally and the terms of the obligation do not have the feel of a normal commercial arrangement;
3. There has been no written demand for payment despite the due date having passed;
4. There has been a delay in enforcing the obligation; or
5. 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 partly, albeit that the amount of money involved is not necessarily decisive, and there are examples in the authorities of large amounts of money being treated as being soft obligations.
6. It is therefore extremely important for parents lending money to their children and who have the intention of having those funds returned to them in the future, to enter into a formal loan agreement.

It is therefore extremely important for parents lending money to their children and who have the intention of having those funds returned to them in the future, to enter into a formal loan agreement however, this is still by no means a guarantee when taking into account the above guidance.

Considerations around hard and soft loans must be carefully considered when a party is intending to divorce and specialist family advice should be taken as early as possible.

At present, the best way for parties to protect their future and record the actual intention of the funds advanced by mum and/or dad is to enter into a pre-nuptial agreement prior to their wedding or in the event the parties are already married they should consider entering into a post-nuptial agreement.

This article deals purely with financial contributions relevant to parties upon divorce. The position is very different when parties are unmarried and in a cohabitating relationship. Specialist advice should also be taken when monies are contributed to a jointly owned property when the parties are not yet married.

If you would like to discuss any of the above, or indeed any other issues relating to divorce or separation, our team of specialist family law solicitors are more than happy to discuss your situation with you. Please be in contact be telephone or email; RMeehan@streathers.co.uk .