When dealing with financial applications on divorce, there can arise some disputes over certain loans and whether these are what the court would call ‘Soft Loans’ or not.
A soft loan is essentially a loan made by family members (or friends) which the court treats as being unlikely to be repaid, or if it is repaid then it would be repaid over a long period without penalty for late payment or without interest.
Conversely, a hard loan, is something which is more clear so a formal loan from a bank, a mortgage, a litigation loan. These are all subject to clear commercial terms as to the rate of interest, terms of repayment and duration of the loan and there is no question that these loans need to be repaid.
When might a soft loan arise?
It is not uncommon for one or both parties to need some financial assistance during the course of the divorce or the divorce proceedings, they are afterall, adjusting to living in two households as opposed to one and they also often have to find legal costs in addition to their usual expenditure. Therefore it is often natural for family members to step in and assist by lending money.
What difference does it make?
The court need to assess firstly whether the money advanced is indeed a loan, as opposed to an outright gift.
Where it is accepted that there is some form of loan, the court would need to decide whether this is a ‘soft loan’ or not. If a loan is thought to be a ‘soft loan’ the judge may exercise discretion and leave it out of the equation for the purposes of considering how to divide the matrimonial assets. Therefore this is a very important distinction to make.
In the recent case of P v Q (Financial Remedies)[2022] EWFC B9 HHJ Hess provided some very useful guidance which can almost act as a form of checklist when considering whether a loan should be treated as a ‘soft loan’ or not.
HHJ Hess set out that that the following factors, which together, or on their own, would suggest a loan was a;
Hard Loan:
(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.
In considering whether a loan is a Soft Loan then the following factors, together or on their own would lean towards the conclusion that this was in fact a
Soft Loan
(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.
Guidance
The above very clear guidance from HHJ Hess should settle a lot of arguments about what constitutes a soft loan for these purposes. If a party is planning to borrow money from a family member, and it is intended that this should be repaid from matrimonial assets then it is important that this is formally documented with clear terms and even interest chargeable. It is advisable to have a formal agreement drawn up by a solicitor to avoid the risk of any arrangements being deemed to be ‘soft loans’ and therefore not taken into account by the court when considering the overall distribution of assets.
