It is not uncommon for parents to lend their children funds to assist them. Commonly this is to acquire real estate. Sometimes these funds can be lent to both parties to a marriage or de facto relationship if the property is purchased during the relationship. How these loans are dealt with in Family Law can be crucial to the outcome of your property settlement.

Example

Greg and Dani married in their early 30's. A year into their marriage, they decided to purchase a property. They had saved a 10% deposit, and Dani's parents kindly offered to assist with a further $100,000. It was verbally agreed that the money was to be paid back to Dani's parents with interest. Greg and Dani were able to apply part of the $100,000 to put down a 20% deposit, and used the rest toward renovations to the kitchen and bathroom. 3 years later, Dani's parents lent them a further $100,000 to continue renovations on the property. 7 years later, Greg and Dani separated. By this time, the property had increased in value significantly.

Following separation, Dani's parents wrote a letter of demand to Greg and Dani demanding re-payment of the loan amount, plus interest. Greg refused to pay the money back and denied that the loan was repayable to Dani's parents. He stated that the loan was never intended to be paid back.

Some possible arguments for Greg's case are:

1. There was no formal Loan Agreement and no documents signed or in writing to say that the funds were to be paid back;
2. There was no attempt during the relationship to pay any of the funds back, and no payments were applied – therefore, it was not a legitimate loan as there was never any intention to pay Dani's parents back;
3. This is an 'unsecured loan' and the deadline under the Statute of Limitations to enforce repayment is 6 years (starting from the date the funds were lent or the date of the past repayment or written acknowledgment of the debt – whichever comes last). In line with the Family Court case of Sulo & Colpetti [2010] FamCA 493, the funds would not be considered as a liability of Greg and Dani's;
4. Even if Greg concedes that the principal funds are to be paid back due to the verbal agreement he made, he does not agree to pay interest.

Dani needs to consider whether she would receive a better outcome in the property settlement:

1. If she applies the funds as a loan to be repaid to her parents (and therefore a 'liability' on the Balance Sheet) provided that she can prove this or if her parents actively pursue their claim as parties to the proceedings; or
2. Whether she should categorise the funds as a 'gift' from her parents during the relationship that can be credited to her as a 'contribution' to the acquisition of matrimonial assets. If so, she will receive a percentage adjustment in her favour.

Loans form a discretionary area of Family Law and technical legal principles apply. You may need to seek specialist legal advice if you have any issues regarding loans that need to be dealt with in your property settlement. Our family law practitioners at Fox & Staniland would be happy to provide you with advice specific to your particular circumstances. Please call us on (02) 9440 1202.