When determining what a fair financial settlement would be, the court must look at the entire financial landscape, including the liabilities of the parties. The court may take a different approach to certain types of loans which were incurred, including whether before, during, or after the marriage.
The information below sets out the difference between the different types of loans, typically referred to as ‘hard’ and ‘soft’ loans, and how the court may deal with them.
Hard loans
Hard loans are typically provided by commercial lenders such as banks or loan providers. They are usually characterised by formal agreements and terms that resemble standard commercial arrangements. Key features of hard loans may include:
- Formal documentation: Hard loans usually involve written agreements that clearly outline the terms and conditions of the loan.
- Commercial terms: The terms of hard loans often include interest rates, repayment schedules, and penalties for late payments.
- Enforcement: There is a higher likelihood of enforcement through legal means if the borrower fails to repay the loan. This may include written demands for payment, threats of litigation, or actual litigation.
- No delay in enforcement: Hard loans are typically enforced promptly without significant delays.
Soft loans
Soft loans, on the other hand, are often provided by friends or family members and are characterised by more informal arrangements. Key features of soft loans include:
- Informal agreements: Soft loans may not involve formal written agreements and are often based on verbal understandings.
- Flexible terms: The terms of soft loans are usually more flexible and may not include interest rates or strict repayment schedules.
- Low likelihood of enforcement: There is a lower likelihood of enforcement through legal means, especially if the lender is a close friend or family member who does not want the borrower to suffer hardship.
- Delay in enforcement: There may be significant delays in enforcing the repayment of soft loans, and written demands for payment are often absent.
Approach taken by the court in deciding whether to take debts into account in a financial settlement
When deciding whether to take debts into account in a financial settlement, the court will need to consider several factors, and the recent case of P v Q [2022] which establishes clear guidance:
Firstly, the court will determine whether a contractually binding obligation to a third party exists. If it does, the court will then consider whether the obligation is ‘hard’ or ‘soft’.
In assessing this, the court will consider a number of the factors set, such as the existence of written terms, the likelihood of enforcement, and the nature of the lender.
The court is likely to treat hard loans as genuine liabilities that need to be repaid. These loans are considered enforceable and are factored into the financial settlement as debts that reduce the matrimonial asset pot. The court will therefore place more weight on these types of loans.
On the other hand, the court is likely to treat soft loans differently. If the court deems a loan to be a soft loan, it may exclude it from matrimonial asset pot. The rationale is that these loans are unlikely to be enforced, and thus, they do not significantly impact the parties’ financial circumstances, and the matrimonial funds should therefore be prioritised to meet the needs of the parties or repay ‘hard’ loans instead.
However, the court has a wide discretion to determine the appropriate classification of the debt and whether to take the debt into account in the financial settlement.
Parties should therefore be mindful about borrowing, both in the course of the marriage but also in respect of legal fees, or following separation. Those considering borrowing in this context may wish to seek specialist legal and financial advice. They will also need to consider all financial implications before doing so.
Please note that this is only general information and if you wish to book an appointment with all of our Family Law Specialists to receive individual legal advice, then please contact our Family Team on 0845 543 5700.
How FJG can help
Our dedicated family law team is here to offer compassionate advice and practical legal solutions. Whether you need help securing protective orders, navigating family home disputes, or ensuring the safety of your children, we are committed to supporting you through this challenging time.
Julia Brewer is a Partner in our Family team advising clients on children cases, separation, divorce and financial relief. She has developed considerable experience in complex children cases, including those involving domestic abuse and harm to children and child care cases including care proceedings.
If you have any queries on the above subject, please do not hesitate to get in touch with Sam on 0845 543 5700 or complete our online enquiry form