If you are contemplating loaning money to friends or family members in a relationship, you should be aware that you might not get full repayment of your loan if those friends or family members separate from their spouses or partners. When parties to a relationship separate, the court will generally order that the assets and liabilities of the relationship be split between the parties. Before it can split assets and liabilities however, the court must identify them.
A common issue that arises in a court’s identification of the relationship’s assets is the status of any monies received by one party from friends or family. A common example could be parents loaning money to their child to purchase a house with their spouse or partner. Whilst this may have greatly helped then, it becomes an issue when the child’s relationship breaks down. Should the money be treated as the parent’s, or is it an asset of the child’s relationship? If the court determines that the money is a loan from the parents, then they can reclaim it. However, if the court determines that the money is a gift from the parents, then it will available for division between the child and their spouse or partner.
To determine whether the money is considered a gift or a loan, the court will examine how the money was provided. The problem here is the intention to repay loans in situations such as above is not always clear. Parents might not expect the loan repay to be repaid. The key feature of the loan is the expectation or intention that the borrower repay the lender. If that is absent, then the money is a gift.
What then, can you do to ensure that monies advanced to someone in a relationship is a loan and not a gift? An easy way would be to formalise the loan. This can be achieved by:
- recording the provision of money in a written loan agreement;
- specifying key details such as a schedule of repayments and the overall loan duration;
- ensuring the repayments are made according to the agreement
- and that these repayments are recorded; and
- ensuring the lender takes steps to secure his loan by either registering a mortgage or a charge over the purchased property.
These are small steps you can take early on to protect any money loaned. If you would like to discuss any of the above further or require advice in this matter, email Straits Lawyers at firstname.lastname@example.org or call us at 08 8410 9069.
Please note that this article does not constitute legal advice and Straits Lawyers will not be legally responsible for any actions you take based on this article.