Loans from relatives – Will they stand up in court?

14 DEC 2021

 

It is very common for people to ask their parents or relatives for financial assistance. It is important to differentiate whether any funds advanced are a gift or a loan. A gift means that there is no expectation for the funds to be repaid. In the case of a loan, the recipient and their partner would be expected to make repayments towards the money owed. 

Alleged loans from family members are liabilities that are often raised in family law matters. Such loans can often be met with skepticism by parties and the Court. 

The effect of one party alleging a loan from a family member that they are solely responsible for is that parties’ net assets are reduced, meaning that they receive a greater amount from the property pool. If the loan is legitimate, then this is fair. However, if this loan is not legitimate, that party in effect ends up with a greater share of the assets than was intended. 

If it is alleged that both parties are required to repay a loan to relatives, then this reduces the total assets available for distribution. This means that both parties would receive less from their property settlement than they would have received but for the loan. 

In order to determine whether funds advanced are a loan or gift, the Court considers various factors, such as:

  • Whether there was an expectation that funds would be repaid. 
  • Whether there was a written loan agreement.
  • Whether the parties made any loan repayments.
  • Any evidence of discussions about the loan and its terms.
  • Whether any security was provided. 

When trying to establish the existence of a loan, parties should present the following documents, if available:

  • A signed loan agreement.
  • Text messages between the lender and recipients about the loan or repayments. 
  • Bank statements showing the receipt of funds.
  • Bank statements showing repayments.
  • Documents evidencing any security, such as a registered mortgage.

In the absence of satisfactory documentary evidence to support the existence of a loan from relatives, the Court’s general position is that the funds will be treated a non-repayable gift, which would not form part of the asset pool. 

The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.

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