How the Court views loans from parents during divorce
6 May 2022 | Lisa Pepper
Getting a loan during a divorce
A frequent issue in financial divorce cases is a loan from a spouse’s parent, often to pay legal fees, and whether that should be factored into the settlement. If the Court is to give it weight and consider it a debt to repaid (like a credit card) we often refer to (and argue that) it is a ‘hard’ debt.
Loans that don’t have to be repaid, or can be repaid someday further down the line, are referred to as ‘soft’. These divorce loans often become very contested issues, with documentation produced (not necessarily contemporaneous) to try to evidence the loan and persuade the Judge it is genuine and needs to be paid back (sometimes with interest) from the divorce settlement.
In this blog, London divorce lawyer, Lisa Pepper, looks at the recent case of P v Q [2022] EWFC B9, during which HHJ Hess gave useful guidance on how the Court will assess these divorce loans:
- Once a Judge has decided that a contractually binding obligation to a third party exists, the court may properly wish to go on to consider whether the obligation is in the category of a hard or soft obligation – the former automatically forming part of the computation, the latter involving an element of discretion.
- There is not a hard or fast test as to when an obligation will be considered hard or soft and the authorities reveal a wide variety of circumstances which cause a particular obligation or loan to fall on one side or other of the line.
- The analysis undertaken targets whether or not it is likely in reality that the obligation will be enforced.
- There is not an exhaustive list of the factors that may make an obligation hard or soft.
- Factors which on their own or in combination point towards the conclusion that an obligation is soft include:
- the fact that it is an obligation to a finance company;
- that the terms of the obligation have the feel of a normal commercial arrangement;
- that the obligation arises out of a written agreement;
- 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;
- that there has not been a delay in enforcing the obligation; and
- (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.
- Factors which may on their own or in combination point towards the conclusion that an obligation is soft include:
-
- 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;
- the obligation arose informally and the terms of the obligation do not have the feel of a normal commercial arrangement;
- there has been no written demand for payment despite the due date has passed;
- there has been a delay in enforcing the obligation; or
- 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 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.
- It may be that there are some factors in a particular case which fall on one side of the line and other factors which fall on the other. It is for the judge to determine, looking at all of these factors and maybe other matters, the appropriate determinations to make in a particular case in the promotion of a fair outcome.
Although this won’t prevent arguments about whether loans are soft/hard, this guidance is useful for clients and solicitors alike, on how the court treats divorce loans obtained by one of the parties, and how far a client wants to spend costs on arguing it.
Lisa Pepper is a partner in the family department specialising in divorce and finance matters. She is also an accredited mediator. She is ranked as a leading lawyer in Chambers UK, Chambers HNW, The Legal 500, Spears HNW directory and Tatler Advisory.
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