Many loans exist between family members, such as parents helping their children to buy their first home or siblings helping each other out in emergencies. These types of loans are often informal and rely on the trust and relationship of the family members involved.
However, this lack of security can carry damaging consequences for a family’s relationships as well as for the enforceability of the loan. When a loan is not a gift, it should be documented and secured to the extent possible.
When families apply to the Family Court for a property or debt settlement, the court takes the assets and the debts of the parties into account. However, the court may disregard the debt in the division of the parties’ assets where an unsecured debt owed to family members is included.
If a debt is genuine, the fact that it is owed to friends or relatives of the party is not relevant. The court will instead take the debt or interest into account when determining the division of assets between the parties.
Issues can also arise when the loan:
- is vague and uncertain
- was unreasonably incurred by one party
- is a strategy to decrease the assets available to be divided with the other party
- is unlikely to be enforced/collected.
Determining whether a debt is genuine and repayable often depends on written evidence, how the parties have treated the debt and the credibility of the parties.
If any evidence provided by the parties is vague, or if there was an “understanding” that the debt would not have to be repaid, the court may find that the debt was not repayable. However, the court will only take this step after careful consideration of the evidence and circumstances of the case.