Court considerations
In P v Q (financial remedies) [2022] All ER (d) 100 (Feb), the Court gave guidance on how to distinguish between a “hard debt” and a “soft loan”. The Court will take into account the following when determining whether a loan is a “hard debt” or a “soft loan”:
- Is there a loan to a finance company or is it to a friend or family member?
- Do the terms of the loan have the feel of a normal commercial arrangement?
- Is there a written agreement or did the loan arise informally?
- Was there a written demand for payment or threat of litigation to recover the money?
- Was there a delay in enforcing the obligation?
- The value of the loan
Is there a loan to a finance company or is it to a friend or family member?
The Court is more likely to consider a loan a “hard debt” if it is to a finance company such as a bank, mortgage company or car finance company. The finance company is going to be less considerate to the debtor’s financial situation whereas family members and friends may more willing to delay repayments.
Whilst most family members and friends are not a finance company, it might be that parents have taken out a loan with a bank or mortgage company in their name as they have a better credit score. In this scenario, it is more likely that the Court will consider this a “hard debt”.
Do the terms of the loan have the feel of a normal commercial arrangement?
The second consideration is whether the loan has the feel of a normal commercial agreement. When you take out a bank loan, it is for a specified figure and there are monthly repayments that need to be met. The Court are more likely to consider a loan a “hard debt” if the debtor is making monthly repayments to their family or friend.
They will also look at whether this was a one off lump sum or whether the family member of friend bailed out the debtor when they are in financial hardship. For example, if they pay the bills the one month and the mortgage the next, it is more likely that this will be seen as a “soft loan” and the Court will view this as financial assistance.
Is there a written agreement or did the loan arise informally?
If there is a written agreement signed by all parties and setting out the terms of the loan, this will give more weight to the argument that the loan is a “hard debt”. However, the Court is conscious that in most cases between family members and friends this is not likely to happen. It is more likely that the loan arose informally over an informal conversation about financial hardship with no formal documentation drawn up. If the loan arose informally, it could still be seen as a “hard debt” depending on the other factors.
Was there a written demand for payment or threat of litigation to recover the money?
The Court will also look at whether the family member/friend threatened to enforce the loan if it was not repaid. This could be either in the civil Court or family Court if financial proceedings are underway.
If a family member or friend has threatened to take legal action if the debt is not repaid, this will give more weight to the argument that the loan is a “hard debt”.
Was there a delay in enforcing the obligation?
If there was a delay in enforcing a formal agreement the Court is more likely to see the loan as a “soft loan”, especially if there was an end date to repay the loan which has expired and the family member/friend has waited until divorce proceedings were under way to enforce the loan. In most cases, there is no end date for repayment so it might be appropriate to enforce when Court proceedings are under way to protect the family member/friends interest.
The value of the loan
The value of the loan also gives an indication as to whether the loan is a “hard debt” or “soft loan”. If parent’s use their life savings to assist their child during financial hardship clearly that money will need to be repaid as they will be reliant upon that money later on in life. If they paid the mortgage for one month to help in times of financial hardship, it is more likely that the loan will be seen as a “soft loan”. The Court will determine whether a creditor would waive part or all of the loan. If they would, then the loan is considered a “soft loan”.
Conclusion
The Court will need to consider all of the factors when determining whether a family loan is a “hard debt” or a “soft loan” and in many cases, different factors may fall either side of the line. It will therefore be up to the Judge to determine which factors to give more weight to and make a decision on that basis.
How can we help?
If you are going through divorce proceedings and are concerned about a loan to a family member/friend or if you are a family member or friend who is owed money by a divorcing couple, it is wise to obtain early legal advice to understand your options.
For further information, please contact Daniel Williams or a member of the family law team on 01905 721600 or email worcester@parkinsonwright.co.uk