The impact of debts on a financial settlement
The last few years have been financially challenging for most families. The increase in interest rates for borrowing and the consequential impact on the costs of living has created issues for many of us. Last November, the estimated average credit card debt per household in the UK was approximately £2,420 and in December 2023 the average amount of unsecured debt per household was estimated to be £4,057.
What types of debt are there?
Debts come in many forms, ranging from credit cards and bank loans, mortgages, Hire Purchase Agreements, through to personal loans from family members. The stress of having to manage such debts is magnified if you are also faced with a separation or divorce. Questions about how and when to repay these debts and whether the responsibility will be shared with your estranged spouse takes on increased importance when dealing with a financial settlement.
It is important to take legal advice on the current position as early as possible and to discuss all aspects of the debts and liabilities so that these may be structured.
There are a number of key questions to consider.
Debts are an important factor in assessing the value of the matrimonial pot. All assets must be valued and any legitimate debts will deducted from such assets. The responsibility for the debts has to be established to enable a calculation of the available assets to be shared. This will have an important impact on a party’s claim as it is only the net available assets that can be included in the matrimonial pot for division. It is also necessary to clarify how the court will consider whether the debt is legitimate, and what evidence there is to prove this.
What is the difference between a "hard" and "soft" loan?
Depending on the type of loan, different factors come into play. A key question to be determined is whether the loan is deemed a “hard” or “soft” loan.
If it is a commercial loan i.e one that has been taken out with a financial institution, bank or mortgage provider, it is likely to be supported by clear evidence in the form of contemporaneous documentation for the loan, which makes it clear who has liability for this debt and how it needs to be repaid. Such a loan is known as a hard loan. From a matrimonial perspective, these tend to be easier to classify and prove as debts that are repayable.
It is always important however to remain alert to the possibility that documents can be digitally manipulated to increase the amount of the loan, or the repayments. In such cases proof may be found by obtaining the original documentation if possible, and to also consider cross checking entries for transfers in bank accounts, and possibly employing a forensic expert to check the dating of the document and to look for forged entries. Any allegations of fraud however must be approached with caution, as without sufficient evidence to prove the case, there are likely to be severe cost consequences for the unsuccessful party.
If however, a party has had to borrow money from friends or family members in order, for example, to purchase property or meet ongoing living costs, these debts may be categorised as soft loans. The question to be determined in these cases is whether there is evidence that the soft loan has to be repaid, or whether, having been lent by a family member it will eventually be waived.
A Case Study
In the recent case of P-v-Q, 2022, Judge Hess gave guidance about the principles that apply to determine whether a debt could be considered hard or soft . Before setting out his guidance Judge Hess stressed the importance of categorising debts in this way, as a way of determining whether the debt should be taken into consideration or not.
In this case, both the husband and the wife raised arguments over monies that had been advanced to them by family members and which they maintained had to be repaid. The husband had repaid £150,000 to his mother during the divorce proceedings stating it was a loan that had to be repaid, and this was therefore £150,000 that had disappeared from the asset schedule. The wife also stated she had received a loan of 30,000 euros from her father before the marriage to help pay for her studies. She stated that this was a debt that needed to be included in the asset schedule as a debt to be repaid.
The wife had a document that was created contemporaneously with the loan but it stated that there was no interest to be paid and no set repayment date. The husband had no documentary evidence of the debt but his mother’s evidence was that she was not likely to demand its repayment and would not take her son to court to enforce it.
In his judgement, having considered these facts, Judge Hess determined that the loans in this case were both soft loans and therefore the £150,000 had to be added back into the asset schedule to be shared by the parties, and the 30,000 euros were not to be taken into consideration as a debt to be repaid.
Guidance was also given by Judge Hess about how to approach, once a debt had been established, whether the loan is to be seen as a soft or hard loan. He stated that each case will depend on the particular circumstances but summarised the factors to be taken into consideration as follows:
Typical Hard Loan Traits:
For a hard loan, some or all of the following factors may be present:
- It would consist of an obligation to a finance company
- The obligation to repay would be a commercial arrangement
- The agreement would be in writing
- The demand for repayment would be in writing, and possibly there would be evidence of a threat or actual litigation or intervention to pursue the repayment
- There would have been no delay in enforcing repayment
- The amount loaned would be of a significant sum , such that it was unlikely that it would be “waived”
Typical Soft Loan Traits:
Conversely, for a debt to be considered a soft loan some or all of the following factors may be present:
- It would be with a friend or family member with whom there continued to be good relations and who would not want to cause any hardship to the party concerned
- The loan would be informal and not “commercial” in nature
- There would be no written demand for repayment
- There would be a delay in enforcement
- The loan amount would be of a size that may be more likely to be “waived”
These factors are not determinative but are principles to be applied. If loan is determined as soft, the court will then use its discretion as to whether it should be taken into account.
There are other steps that can also be taken if it is suspected that monies have been transferred by one party from a matrimonial account to another person with the intention of defeating the other party’s claim. The monies may have been paid ostensibly in order to repay a debt, but if there is suspicion this was not the true intention, action can be taken under s 37 of the Matrimonial Causes Act 1973 to ask the court to set aside the transfer in question. It will be necessary to prove that the intention was to defeat the other party’s claim and so clear evidence must be collated before embarking on this action.
Let Parfitt Cresswell Help
If you find yourself faced with the prospect of a divorce or separation, it is important that you take advice from your solicitor as early as possible. Your solicitor will need to take detailed information about all debts and liabilities so that this information can be presented to the court in its best light to seek to establish that the debt is legitimate and must be repaid. If the need to take a loan should arise within the course of the divorce proceedings, for example to borrow money to pay for legal costs, it is important that any loan from a family member or friend must be clearly documented. Although there is no guarantee that it will be possible to ensure a loan is seen as a hard loan, it may assist if it is evidenced in a written document signed by the parties contemporaneously with the loan, that there is clarity about the repayment terms and the inclusion of commercial elements in the loan. Although the ultimate decision is always with the Court, legal advice will help to ensure that all is done order to help achieve the best outcome for you in the financial settlement.
If you would like to speak to a legal expert here at Parfitt Cresswell, take advantage of our complimentary initial consultation and contact us today. Call 0330 912 1009 or click on the link below to arrange your no obligation consultation now.
