There are many situations where family members help each other out by lending money to each other. The loans are often unrecorded, informal, and rely on the trust and relationship between the family members involved. They are sometimes called “unsecured” debts. Circumstances where there might be an unsecured debt include:
- Where parents help their child or children buy their first home or make improvements to their home;
- Where siblings help each other out for short term emergency loans;
- Where members of family invest in a new business established by a member of the family; and
- Where parents lend money to a child to assist them with legal fees.
Usually, when parties apply to the Family Court for a property settlement, the Court will take into account the assets and liabilities of the parties. However, the Court may disregard an unsecured debt owed to family members in the overall division of the parties’ assets.
If the debt is genuine, the fact that it is owed to friends or relatives is not relevant, and the Court will include the debt as a liability it considers the division of assets between the parties.
If the debt is vague or uncertain, was unreasonably incurred by one party, is a strategy to decrease the assets available to be divided with the other party, or where the debt is unlikely to ever be enforced/collected, the Court may exclude the debt from the joint liabilities. There is also a difference between secured and unsecured creditors (see HHG Legal Group’s article on secured and unsecured creditors who are family members).
Ultimately, the determination of whether the debt is genuine and repayable, or whether the legal obligations and interest are real, will depend on:
- the existence of written, historical evidence as to how the parties have treated the debt or legal obligation/interest; and
- and the credibility of the parties at Trial.
Where the evidence of the parties is vague, or where there was an “understanding” that the “debt” would not have to be repaid, the Court may choose to find that the debt was not repayable, and distribute the pool of assets without deducting the debt owed to the family member as a liability of the parties. However, the Court will only take this step after careful consideration of the evidence and circumstances of the case.
*This information serves as a general guide and does not constitute legal advice. It is based on our research and experience at the time of publication. Please consult our knowledgeable Legal Team for any specific inquiries or advice relevant to your circumstances, as the content may not have been updated subsequently.