Was it a loan or was it a gift? How does the Family Court treat debt owed to family members?
It is not uncommon for family members, such as parents or other siblings to lend money to parties during their relationship. The majority of these loans rely on trust and the relationship between the family members involved, rather than formal documentation, for repayment.
Such loans can include parents helping adult children purchase their first home, investment by family members in a new business being established by another family member or perhaps siblings lending funds to cover a short-term emergency for another sibling.
What happens if the relationship breaks down? Can these loans ever be taken into account?
When considering a property division, the Family Court looks at all of the assets and liabilities of the parties. Quite naturally where one of the parties has a significant debt owed to their parent or sibling under one of these unsecured loans, there is an expectation that the debt will be taken into account, and an adjustment made to enable its repayment. There is almost always an expectation by the lender that this debt will be taken into account.
The Family Court will take a genuine loan into account in an asset division decision. But how does the court decide whether the loan is a genuine debt or simply a strategy by one of the parties to lessen the value of the assets available for division?
The question of whether the money was a loan or a gift is determined by the evidence available to the court.
Some of the evidence the court looks for includes written evidence such as loan documentation outlining the amount of loan whether there is interest payable and the terms for repayment. Where there is no such formal documentation, if the evidence demonstrates the parties have always treated the debt as a legal obligation, then it is more likely to be taken into account as a genuine loan. If the evidence of the parties is vague, this may lead to the court concluding that the debt would not have to be repaid, therefore allowing the court to distribute the assets of the parties without any regard to the third party interest. The Family Court will only come to this decision after examining the evidence and the particular circumstances of the case carefully.
In a very recent case, although formal documentation existed of a $192,000 loan from the husband’s parents to the husband and there was evidence of that money going to accountant of the husband’s parents, there was no evidence that money actually made its way into the husband’s hands. The terms of the alleged loan agreement were so vague that the court concluded that there was no requirement that any money was to be repaid. The debt was disregarded in the property division.
The way the court has treated these cases demonstrates that where there are loans from family members to the parties, If the debt is to be recoverable, the loan should be documented and secured as much as possible. Without this security the question of enforceability and being taken into account in property division could be fatal.
This article is for general information only and does not constitute specific legal advice.