Divorce Loans – Which do you take, the Hard or Soft option?
In this post, Paul Read explores the way in which the family court is likely to treat certain divorce loans within a dispute about matrimonial assets. Are they ‘hard’ or ‘soft’?
It comes about as a result of the judgment of HHJ Hess in P v Q (Financial Remedies)  EWFC B9 (10 February 2022). HHJ Hess stands out as a jurist and communicator and his most recent judgment is incredibly useful in practical terms.
Hard of Soft Divorce Loans?
What are Hard loans and what are soft loans? That is what the judgment seeks to assist with.
When separated spouses argue in court about how their finances should be distributed, the court (generally) starts by establishing what the matrimonial assets are. This is (generally) everything owned by one spouse plus everything owned by the other spouse plus everything jointly owned – minus the liabilities of each spouse and the joint liabilities. What remains is the pot which the court must decide how to divide.
There are more nuanced factors such as pre acquired wealth and wealth accrued post separation but they are for another discussion.
Some liabilities are straight forward. A mortgage is an unambiguous debt which must be repaid and its terms will always be clear. A bank loan will similarly be a clear debt which must be repaid. A HMRC tax bill, for either party, will usually be viewed as a debt which must be repaid.
But what about the common situation where a family member or friend provides financial support to one spouse because they are struggling through the process of divorce.
Case Study – The Ryans
Let us create the fictitious example of Mrs Margaret Ryan and Mr Ernest Ryan. They have been married for 20 years, have two grown children who have long since flown the matrimonial nest and jointly own a house, two cars and some money at the bank. Each has a respectable pension pot and each have enjoyed similar salaries for years.
An equal division of the assets would provide each of the Ryans with enough to meet their housing needs and start a new life, independently. There is no doubt that an equal division of assets is the correct result.
However, Mrs Ryan doesn’t quite see it this way. At the beginning of the separation process and for reasons known only to Mr Ryan, he withdrew all of the joint savings at the bank which led to Mrs Ryan issuing an application with the court for a financial order.
During the financial disclosure which followed, Mrs Ryan states that she has borrowed £20,000 from her brother in order to cover legal costs and living costs and that must be paid back to her brother from matrimonial funds before they can be distributed.
Is it a Divorce Loan?
This type of scenario happens quite frequently and the question is – How is this purported loan to be treated?
People naturally sympathetic to Mrs Ryan may say that it is indeed a loan and must be repaid from the matrimonial assets before Mr Ryan gets his share of what is left, especially as Mr Ryan left Mrs Ryan without funds at the start of the divorce. This is where the debtor – Mrs Ryan – might say that she has a ‘Hard loan’ which must be paid back without any doubt.
People more sympathetic to Mr Ryan may say that this is a brother helping out his sister and there is little if any chance the money will ever have to be repaid. This would be to say that the loan is very much a ‘Soft loan’ and unlikely to ever be repaid, or at most over a long period of time and without penalty for late payment.
It is from this occasionally murky factual matrix that the question of ‘Hard’ and ‘Soft’ loans often emerges.
First of course is the question of whether there was any loan at all. Was the money really advanced to Mrs Ryan by her brother or is this a device to reduce the funds available to Mr Ryan whilst allowing Mrs Ryan’s brother to pocket some of the matrimonial funds. Some people lie. It is ill advised and usually fatal. Do not be tempted.
Where it is found as a matter of fact that there is some form of loan, HHJ Hess says the following:
“Once a judge has decided that a contractually binding obligation by a party to the marriage towards a third party exists, the court may properly wish to go on to consider whether the obligation is in the category of a hard obligation or loan, in which case it should appear on the judges’ computation table, or it is in the category of a soft obligation or loan, in which case the judge may decide as an exercise of discretion to leave it out of the computation table.”
In other words, the soft loan is unlikely to be repaid from matrimonial funds.
Guidance for ‘Hard’ or ‘Soft’ Divorce Loans – Factors applicable to each
How should the judge approach this? HHJ Hess provides the guidance:
Factors which on their own or in combination point the judge towards the conclusion that an obligation is in the category of a ‘hard’ obligation include:
(1) the fact that it is an obligation to a finance company;
(2) that the terms of the obligation have the feel of a normal commercial arrangement;
(3) that the obligation arises out of a written agreement;
(4) that there is a written demand for payment, a threat of litigation or actual litigation or actual or consequent intervention in the financial remedies proceedings;
(5) that there has not been a delay in enforcing the obligation; and
(6) that the amount of money is such that it would be less likely for a creditor to be likely to waive the obligation either wholly or partly.
On the other hand….
Factors which may on their own or in combination point the judge towards the conclusion that an obligation is in the category of ‘soft’ include:
(1) it is an obligation to a friend or family member with whom the debtor remains on good terms and who is unlikely to want the debtor to suffer hardship;
(2) the obligation arose informally and the terms of the obligation do not have the feel of a normal commercial arrangement;
(3) there has been no written demand for payment despite the due date having passed;
(4) there has been a delay in enforcing the obligation; or
(5) the amount of money is such that it would be more likely for the creditor to be likely to waive the obligation either wholly or partly, albeit that the amount of money involved is not necessarily decisive, and there are examples in the authorities of large amounts of money being treated as being soft obligations.
Divorce Loans: Steps to take to protect yourself and the lender
If a party borrows money from a friend or relative and expects it to be repaid (at least in part) from matrimonial assets there should be a contemporaneous written loan agreement with clear terms and even interest chargeable. It should be clear that the document gives rise to a legal relationship and repayments should be made in accordance with the terms from the outset.
Anything short of that risks the classification as a ‘soft’ loan which may then not be taken into account by the court, and could have a serious impact upon the overall net assets for distribution.
Paradigm Family Law have a team of experienced lawyers to help guide you through the process of divorce, just waiting to hear from you.
If you would like more details on this or want to discuss your family law matter, please do not hesitate to contact James, Frank, Evelyn or Paul. Paradigm Family Law offers a free initial consultation and our fixed fee solutions cover financial proceedings from start to finish. You can call us on +44 (0)20 3633 2301 or email us to [email protected].