Bank of Mum and Dad loans in divorce: are family loans repayable?

What is the “Bank of Mum and Dad” in divorce?

The “Bank of Mum and Dad” describes financial support provided by parents or family members, often to help with buying or improving a home.

Disputes over money borrowed from parents are increasingly common in divorce, particularly where the “Bank of Mum and Dad” has helped fund a property purchase or family living costs. Whether that money is treated as a loan or a gift can impact on the financial outcome.

On divorce, the family court will consider whether that support was intended as a loan that should be repaid, or a gift with no expectation of repayment. This distinction can be crucial when determining how assets and liabilities are shared on divorce.

How do family courts treat loans in divorce?

In financial remedy proceedings, the family court’s primary objective is to achieve a fair division of assets between the parties, taking into account the factors set out in Section 25 of the Matrimonial Causes Act 1973, which refers to, (among others, the parties’ needs and resources as well as any debts or liabilities that they may need to repay.

In some cases, parties may owe money to a family member and so, the court must analyse whether repayment of the loan or debt is genuinely repayable, legally enforceable and therefore whether it is to be considered a factor in financial settlement.

What is the difference between a hard loan and a soft loan?

The key issues when considering family loans in matrimonial matters is whether the loan is a hard or soft loan, with a hard loan being legally binding and obligatory to repay and repayment of a soft loan discretionary.

When is a loan considered a hard loan?

The family court is most likely to recognise a loan as a hard loan if there is clear documentary evidence showing that the loan was a formal agreement, signed by all parties (i.e. the those lending and those borrowing) and that the agreement sets out clear terms for repayment – such as when repayment is due, whether interest will become payable if not repaid and enforcement of this.

Ongoing monthly payments give an important impression of commerciality and the absolute requirement for repayment.

When is a loan treated as a soft loan or gift?

A loan is most likely to be treated as a soft loan if there is no formal and written agreement and if the terms regarding repayment of the loan are vague and the lender has not sought to repay it.

A soft loan is more akin to a gift and mostly arises (although not always) in circumstances where one of the parties’ parents have given money to them and/or the parties to either purchase property, renovate a property, and/or to assist the family financially.

Courts will often treat them as a gift or early inheritance and where finances are stretched, may take the view that no creditor will come knocking at the door therefore those loans can be ignored in the overall asset division.

Practical advice on family loans in divorce

If a party wishes to claim a family loan as a liable debt in financial remedy proceedings, they should ensure that a formal loan agreement has been put in place which clearly sets out the loan’s repayment terms.

This is an equally protective measure and important for the family member who is providing the loan and who may also wish to protect their financial contribution.

Any loan agreement will be under scrutiny in financial settlement negotiations to assess whether the loan is a genuine liability or if the money provided is in fact a gift and is discretionary in nature.

It is therefore important to ensure that if money is provided by the “Bank of Mum & Dad” and it really is not a gift, a loan agreement is clearly and professionally prepared and executed, correctly as should such documents become important.

The lender and the borrower must have clear consistent evidence to rely on and be prepared to justify their claim.

In summary

Family support from the “Bank of Mum and Dad” can be invaluable, but in the context of divorce it often becomes a point of dispute.

Whether such financial assistance is treated as a repayable loan or a non‑repayable gift can impact on financial remedy proceedings.

The family court will look beyond labels and examine the reality of the arrangement, focusing on evidence of intention, formality and enforceability.

Ultimately, careful planning at the time money is advanced can help avoid uncertainty, protect family relationships and ensure that, if divorce occurs, the court has the clarity it needs to reach a fair and practical outcome.

How can Morr & Co help?

If you would like to discuss your situation, our experienced family team will be able to answer any questions you may have. You can contact them by email info@morrlaw.com or by calling 0333 038 9100.

Disclaimer
Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.