Are loans part of the asset pool?
Updated: 22 October 2023 · Read time: 5 minutes
Loans are generally treated as part of the asset pool, and the Courts may decide the loan is to be repaid by one party or jointly as part of the property settlement.
People often ask their family and other loved ones for financial help. This is usually given in the form of either a gift or a loan.
It is important to distinguish between these two forms of giving when considering assets between you and your spouse, as it may effect the outcome of your property settlement and how much you will receive.
What is a gift?
If funds are given as a gift, it means there is no expectation that the receiver will ever have to pay the money back. The funds given will be treated as belonging equally to both you and your former spouse or partner. Commonly, it is treated as a contribution by one of the parties to the relationship.
What is a loan?
If a loan is given, the recipient is expected to repay the money borrowed.
Often, there will be an argument over whether money was given as a gift or a loan. In this circumstance, the Court will consider different factors when coming to a decision, including:
- Whether there was an expectation that the money would be paid back
- Whether there was a written loan agreement involved
- Whether any loan repayments or attempts to pay back the money were made
- Any evidence of discussions about the loan and/or potential terms of the loan
- Whether any security was involved/provided
If you are trying to establish that a loan was present, it would also be useful to gather and present the following documents if possible:
- A loan agreement you and/or your spouse has signed
- Text messages or evidence of communications between you and/or your spouse and the person you received money from
- Bank statements showing you have received the funds
- Bank statements showing repayments of the funds
- Evidence of security (eg. mortgage)
A written agreement should include:
- The amount borrowed
- How the money will be repaid (the amount and frequency of repayments)
- Any interest required
- If there is a guarantor (someone to pay the money if you cannot)
- If there is security for the loan
What happens if you can’t show these things?
If you are unable to show evidence that the funds you received were given as a loan, the Court will generally treat the funds as a gift. Therefore, there is no expectation to repay it and it does not form part of the asset pool.
What happens if you DO have evidence that the funds are a loan?
First, it is important to note that claims of alleged loans from family members are often met with scepticism and doubts. However, if you have documentary evidence (such as that included in the list above), the funds will be treated as a genuine debt of the parties.
In response, the Court will likely make one of the following orders:
- The loan needs to be repaid by the parties as a part of the property settlement, or
- One party will have to repay those funds to the exclusion of the other.
With this option, the party who has to pay back the money has a reduced amount of net assets than previously thought due to the debt, and so they will receive a greater amount from the property pool to make up for it.
If the loan is real and legitimate, that is perfectly fair.
However, if the loan is not legitimate this can be very unfair as the party who alleged the loan essentially ends up with a greater share of assets than they should have.
How does the Court decide how to split asset pool debt amongst the two parties in a property settlement?
A debt does not necessarily have to be split evenly between you and your former partner, and you should not assume that this will occur. When dividing the debt of the loan between the two parties, a Court will ask the following questions:
- Was the loan received before, during or after the relationship?
- Which party received the loan?
- Which party was paying off the loan during the relationship (if repayments were occurring)?
- How big was the loan and how much does it affect the overall asset pool?
Along with asking these questions, the Court will also consider the following factors:
- The duration of the relationship
- Financial contributions made by each party during the relationship
- Other contributions made by each party during the relationship
- Any children or dependents of the relationship
- Differences in the income of both parties
In general, the Court will look at who received the loan, the name the loan is in, and the purpose of the loan. However, it is important to note that just because a loan is in one person’s name does not mean it will remain with just that person after separation or divorce.
What happens if both parties are alleged to have loans to repay?
If you and your former spouse BOTH have loans you are required to pay back, then the total asset pool available for distribution is smaller. As a result, you will both end up receiving less from your property settlement than you otherwise would have received, to counter the money you have to give away.
It is important to note that these circumstances are looked at via a case-by-case basis and no two cases are the same.
If you would like advice on the impact of your loan to your divorce, get in touch with us via the contact form.
