Having joined the firm in April as a paralegal, I am now
undertaking my first seat with the family group. So far I have been involved in
a number of interesting cases, ranging from complex high-net worth financial disputes to cases involving children arrangements. My tasks have been extremely
varied and have included drafting documents and correspondence, putting
together trial bundles, liaising with counsel and attendance at court. Each case
has been as fascinating as the last, primarily due to the subtle nuances unique
to each scenario and the engaging human aspect of working closely with
clients.
One issue that has come up on several occasions is how the family courts treat loans from family members and friends within financial remedy proceedings. It is common for family members or close friends to lend each other money on the basis of a verbal agreement and with little or no formalities in place. Of course, when life is running smoothly, this causes no problems.
One issue that has come up on several occasions is how the family courts treat loans from family members and friends within financial remedy proceedings. It is common for family members or close friends to lend each other money on the basis of a verbal agreement and with little or no formalities in place. Of course, when life is running smoothly, this causes no problems.
"But divorce can put such casual arrangements under the spotlight."
Getting divorced can involve two different sets of proceedings. First, divorce proceedings, which consist of a straightforward paper application to the court to bring the marriage to an end. Second, if the parties cannot agree between themselves, financial remedy proceedings to settle their financial affairs.
Financial disclosure is part of the financial remedy
proceedings. This involves comprehensively setting out a party’s financial
circumstances, including income, assets and liabilities with supporting
documentation such a bank statements, tax returns and payslips. This is so that
the court can see what there is in the marital ‘pot’ to be divided. A loan
falls within the category of liabilities to be disclosed.
If the loan in question is a commercial loan, which is
commonly referred to as a ‘hard loan’, the borrower will have a contractual
obligation to repay it. It will be clearly documented by a loan agreement with
the lender and it may be secured against an asset. The borrower will repay the
loan according to the loan agreement, which will specify what interest will
apply, when payments will be made and what will happen if repayments are not
made.
However, it is rare that monetary agreements
within families are formalised in the same way. If one of the parties to the
marriage borrows money from a family member, there is often no written
evidence, a low or zero interest rate and a relaxed approach to repayment. This
can mean that these loans are classed as ‘soft loans’. As a consequence, the
court may treat the loan differently, such as construing it as a gift which
does not need to be repaid, or that, even if repayment was intended, there
would be no consequences if this was not effected or effected over a longer
period than previously anticipated.
Talking about formalising money arrangements with family
members is frequently seen as awkward and unnecessary. It is a rare parent who
will ask for newlyweds to sign a loan agreement.
"However, it is important to be realistic and consider what life might throw at you."
If you are planning to
loan money to a family member, it is a good idea to have a loan agreement
signed by both parties which details the terms of the loan, including the fact
it is to be repaid. There is also the option of securing the money against, for
example, a property or another valuable asset. Such steps may jar the fluidity
of family life, but could prove crucial protection in the event of a subsequent
divorce.
Posted by Katherine Yu, trainee in the family practice group.
Katherine started her training contract with B P Collins in May 2015, after joining the firm as a paralegal in April 2015. Katherine graduated from the University of St Andrews with a joint honours degree in International Relations and Modern History. She went on to study the Graduate Diploma in Law at the College of Law and the Legal Practice Course at BPP in Holborn.