Disputes over parental financial contributions in property settlements

My ex and I owe money to my parents.  Does this debt form part of our property pool when we are negotiating our property settlement?

A common dispute in property settlements is when one party’s parents have given the parties money during their relationship. Sometimes, one party will say that the funds were a loan and they seek to have those funds repaid to their parents from the joint property pool whereas the other party may argue that the funds were a gift and never expected to be repaid.   

Court Treatment of Parental Gifts

The Court generally treats gifts from parents to be for the benefit of the party whose parents gave the gift and an indirect financial contribution by the party receiving the gift. The weight that the Court gives the contribution depends on the amount of funds versus the value of the property pool, how long ago the gift was given and how one or both parties spent those funds.

Treatment of Loans from Parents

If one party’s parents loan the parties funds throughout their relationship, then this debt can be factored into their property pool and their overall property settlement. It is quite common in family law disputes for one party to try and insist that funds advanced by their parents as a gift, was actually a loan and not a gift, and therefore, a debt which should be repaid from the parties’ joint property pool. 

Determining whether funds were a loan or a gift

For the Court to find that the funds are a loan as opposed to a gift, the Court will look at things like:-

1. Whether there was a formal loan agreement drawn up between the parties;
2. The terms of any loan agreement including the duration of the loan, what the funds are for, any repayment schedule and interest charged;
3. Whether or not the party’s parents have ever enforced the repayment of the loan by the parties; and
4. Whether there was a mortgage registered in favour of that party’s parents to secure the repayment of the loan or other form of security.

Court’s view on insufficient evidence

If there is no solid evidence to support the loan exists and that it is repayable in future, then the Court may not accept that the funds were a loan and, in that case, may disregard the debt.  Even if there is a loan agreement with the repayment terms and a registered mortgage, then the Court can still disregard the debt if it is clear that there is no expectation that the debt was supposed to be repaid or the loan agreement enforced.

Parental involvement in property settlement proceedings

If your ex does not agree or accept that the money advanced to you were a loan, then your parent/s can often end up becoming parties to your property settlement proceedings and incur their own legal costs in applying to the court for orders which secure the repayment of the loan from you and your ex’s joint property pool.   

Seeking legal advice for property settlements involving parental loans

If you are in the process of negotiating a property settlement with your ex-spouse, and either one of you may owe money to your respective parents, then we strongly recommend that you obtain legal advice to discuss your options. Similarly, if your parents are thinking about loaning you and your partner funds, then we would encourage all parties to obtain independent legal advice to ensure that any relevant loan documents are prepared and actioned correctly. Contact our office to make an appointment with one of our solicitors to discuss your circumstances and obtain advice on your situation on (07) 4963 2000 or through our online contact form below.