What happens to family debt during a divorce?
A lot of people profit from financial arrangements in which family members and/or friends assist them financially. This is most common when parents give their adult children money to help them buy a home or make other financial ventures. But what happens if there is a divorce and a disagreement between the spouses over the money that was handed to them?
When are debts considered during a divorce?
The question of whether money given to one or both spouses by friends or family defines a loan that has to be paid back or not is often raised in divorce proceedings. It is common for one spouse to claim that the money given was a loan therefore a debt that must be paid back, while the other would argue that it was merely a gift.
Proving the existence of a debt that is technically enforceable is essential to getting a loan. Evidentially, the presence of a loan may be confirmed by a form of document or, in certain situations, merely by the debtor stating they gave the money as a loan (although this may have an influence on its handling, as discussed below).
What happens if you can prove that the loan was given?
In any financial process during a divorce, the main distinction is made between a ‘hard loan’ and a ‘ soft loan.
If the court is convinced that there is a hard loan, it will decide that it is an obligation that must be repaid, just like any other commercial debt, which may include matrimonial debt. Therefore, it is fully considered in the assessment of a couple’s assets and obligations when deciding how matrimonial assets should be shared as part of their divorce.
A soft loan, on the other hand, is one made in such a way that the lender is willing to wait for repayment for as long it takes, or perhaps not get it at all. If the court decides that it is a soft loan, the Judge may opt not to include it among the debts considered when determining the divorce’s financial settlement.
Soft loans vs Hard loans
A loan does not necessarily fit into one of the two categories based on a set of parameters. In divorce proceedings, courts often differentiate between hard and soft loans, which has significant effects on how the obligations are handled.
Soft Loan
- The loan was made informally, with no commercial requirements for return.
- It is a debt owed to a family member or friend with whom they have a good relationship.
- Despite the fact that the due date has passed, no formal demand for payment has been sent regarding the joint debt.
- The sum indicated represents the probability that the lender will be prepared to write off.
- There has been a delay in taking any action to enforce the debt.
Hard Loan
- It has conditions similar to those of a business contract.
- It is a debt owed to a financing firm.
- There has been a formal demand for payment, the possibility of a lawsuit, or actual litigation involving the debt.
- If the loan isn’t paid, it will be enforced.
- There is a written contract.
- The sum is considerable to the lender and unlikely to be written off.
- When the debt became due, it was enforced without delay.
A judge must evaluate which of the many reasons pointing in both ways are most convincing and decide the loan’s status. In most cases, there are a number of these criteria. Understanding whether a loan is considered hard or soft may have a substantial impact on financial settlements.
What if the debt is classified as a hard loan?
During divorce proceedings, the court has no power to change the amount owing to the lender. They are also unable to pass on the debt load from one spouse to the other, even if the debt was incurred during the marriage. They may, however, consider the presence of the debt when determining how to split the couple’s assets.
What role will the lender play in the divorce procedures if the debt is disputed?
The lender may be required to testify in court regarding the joint debt. This is likely to include submitting a witness statement and maybe testifying in court on the loan. In rare cases, the lender is appointed as an intervenor in divorce proceedings, becoming a party alongside the spouses. They would then typically need their own legal counsel.
How our family lawyers can assist you?
At SGT Law Firm, our experienced family lawyers will give competent advice on financial concerns related to divorce, including divorce and debt
We can help you clarify loan conditions so they are correctly classified as hard or soft loans. Handling complicated divorce cases including house loans, personal loans, and family financial contributions. Ensure a fair distribution of assets while properly dealing with debts and obligations.
Our skilled staff is here to provide personalised legal solutions, whether you’re battling debt and divorce or are just looking for financial clarity. Contact us immediately for assistance!
