A Loan Way Ahead: Making the HARD decisions about funding your legal costs!

A big challenge for many clients involved in financial proceedings following divorce is how they are going to fund their legal costs. This dilemma is often compounded by the increasing delays currently being experienced in the family courts.

More frequently, clients are turning to the generosity of family and friends for loans to help cover legal fees. Often, this is done on the misguided assumption that any such borrowing will be recoverable from the matrimonial assets as part of the overall settlement to enable to repay the loans. That is, however, not always the case, and it is very common for the other party to the marriage to contest the validity of the debt or the circumstances in which it must be repaid.

While support from family and friends can ease the immediate pressure of mounting costs, it is important to understand how the court treats these arrangements, and to consider the lender’s financial position before accepting any funds.

How the family court views loans:

In financial proceedings, loans are commonly described as being either “soft” or “hard” debts.

1. Soft loans A “soft” loan is one where there is unlikely to be an immediate (or any) expectation of repayment. Typically, there is no written agreement setting out the terms of the loan (such as interest payable, duration, or repayment terms) and it is unlikely that the lender would take legal action to enforce repayment of the loan.

Example: A loan of £50,000 from a mother to her child to pay their legal fees, with no written agreement and no clear repayment plan.

2. Hard loans A “hard” loan is usually obtained from a bank, building society, or finance company. It will be documented by a formal loan agreement setting out the terms and conditions, and the lender would be likely to take enforcement action if the loan is not repaid.

Example: A loan of £50,000 from a bank under with a signed loan agreement specifying the term, interest rate, and repayment terms.

A loan from family and friends ≠ no expectation of repayment

Whilst a loan from a family member or friend may fall at the “softer” end of the scale, it does not mean there is a hard and fast rule that loans of these nature are never expected to be repaid. The court will look at the reality of the arrangement and exercise its discretion based on all relevant circumstances. In many cases, family and friends expect and need repayment of these funds and, as with many things in family law, it must be dealt with on a case-by-case basis.

For example, an elderly parent may lend £50,000 from their only savings and require repayment to meet their living costs now that they are retired. In that situation, repayment may be essential and expected as soon as reasonably possible.

Why this is important

The court’s focus is whether the alleged loan is a genuine liability that must be repaid, and whether it should be taken into account when assessing how the “matrimonial pot” should be redistributed to meet the parties needs. This is to avoid parties asserting informal and undocumented “loans” exist as a way of reducing the assets available for redistribution between them or to secure a larger share of the available assets. It is therefore extremely important when borrowing from family or friends that needs to be paid back to take sensible steps to evidence that the loan is genuine and repayable, ideally before the funds are advanced.

Questions to ask yourself before accepting a loan from family or friends:

1. Is there a clear expectation that the loan must be repaid?

2. Can the lender afford to lend the money without being left financially vulnerable?

3. Is there a written loan agreement setting out the amount, interest (if any), repayment terms, and consequences of non-payment?

4. Would the lender realistically take enforcement action if the loan is not repaid?

5. When and how will the loan realistically be repaid?

6. What evidence is available to show the court this is a genuine liability?

7. What are the financial, legal, and family consequences if the loan is not repaid, or if it is not taken into account by the court?

Next steps

If you are relying on a loan from family or friends to fund your legal costs, it is worth considering whether the arrangement should be formalised and what evidence will be needed to demonstrate that it is a genuine debt. Taking advice early can help you avoid difficulties later in the proceedings and running the risk of being left with insufficient funds to be able to repay this loan. It is important to consider all options to fund your legal costs before borrowing money from family or friends, as they may be left out of pocket if the court does not accept the loan is genuine or immediately repayable.

If you have any questions about the treatment of loans in family financial proceedings, we would encourage you to contact us to discuss the options available to you.