Australia: Unsecured debt owed to family members – how is this dealt with in Family Law?

Last Updated: 9 October 2015
Article by Simon Creek

There are many situations where family members help each other out and provide unsecured loans to each other. The loans are often unrecorded, informal, and rely on the trust and relationship between the family members involved.

Examples of such loans include:

  • Where parents help their child or children buy their first home;
  • Where siblings help each other out for short term emergency loans;
  • Where members of family invest in a new business established by a member of the family; and
  • Where parents lend money to a child to assist them with legal fees.

Generally, when parties apply to the Family Court for a property settlement, the Court will not only take into account the assets of the parties, but will also take into account the debts of the parties. However, where the debts of the parties include an unsecured debt owed to family members, the Court may sometimes disregard the debt in the division of the parties' assets.

Where the debt is genuine, the fact that the debt is owed to friends or relatives of the parties to the marriage (or de facto relationship) is not relevant, and the Court will take the debt or interest of the third parties into account in determining the division of assets between the parties. Issues arise however, when the "loan" or legal obligation is vague and uncertain, was unreasonably incurred by one party, where it is simply a strategy to decrease the assets available to be divided with the other party, or where the debt is unlikely to be enforced/collected. There is also a difference between secured and unsecured creditors.

Ultimately, the determination of whether the debt is genuine and repayable, or whether the legal obligations and interest are real, will often depend on the existence of written evidence, historical evidence as to how the parties have treated the debt or legal obligation/interest, and the credibility of the parties at Trial. Where the evidence of the parties is vague, or where there was an "understanding" that the "debt" would not have to be repaid, the Court may choose to find that the debt was not repayable, and distribute the pool of assets without deducting or discounting the debt owed to the third party as a liability. However, the Court will only take this step after careful consideration of the evidence and circumstances of the case.

In addition, as referred to above, there is also a difference between secured and unsecured creditors (who are family members). In the unreported Full Court decision of Winston v Winston (No 2) [2013] FAMCFC 147, the mother of the husband appealing against the decision had provided the husband the husband with a loan of $1,353,100 to purchase a property, as well as a smaller loan of $15,5176 for improvements made to the former matrimonial home. The Federal Magistrate hearing that matter made a finding that the husband's mother would never enforce the loans ("there is simply no chance whatsoever that Ms M Winston will ever require repayment"), and on that basis, the loans were not included in as liabilities of the husband in calculating the matrimonial pool to be divided between the parties. The Full Court found that in reaching his decision, the Federal Magistrate took into account the following factors:

  • The husband is and historically has always been completely financially reliant upon his family of origin;
  • That the husband's mother has a good relationship with the husband, and clearly trusts and holds him in high regard, nominating him as an executor of her will;
  • That the husband's mother has substantial personal wealth held in trust structures which she controls and which are worth in excess of $20 million;
  • The husband's mother wanted her son to move to a place closer to his family of origin;
  • The husband's mother was aware that the husband did not have the funds to enable him to repay the debts;
  • The timing of the husband's purchase of property and the circumstances surround the loan from his mother. Specifically, the husband entered into a loan agreement with his mother 9 days after the trial of the matter and settled the purchase of the property 15 days after the trial in circumstances where the husband did not raise the purchase of the property at any point during the trial.

Notwithstanding the above, on appeal, the Full Court found that the Federal Magistrate fell into error by completely disregarding the debts. The Full Court found that the Magistrate fell into error in two ways. The first was that the Magistrate failed to give appropriate weight to the unchallenged evidence of the husband's mother and provided insufficient reasons for his rejection of her evidence that the loans were repayable. The second was that the Magistrate failed to appreciate the difference between a secured creditor and an unsecured creditor. Specifically, the Magistrate relied on two earlier cases of the Family Court dealing with the enforceability of loans from family members and said that those cases allowed him to disregard the loans from the mother in this case. The Full Court examined the cases referred to by the Magistrate and noted that while the Court may disregard the unsecured liability where the evidence of the parties is vague or uncertain, or if it is unlikely to be enforced or if it was not reasonably incurred, the position is different where the liability is secured. In the earlier case referred to by the Magistrate, the Full Court noted that the liability was not simply deducted but was applied at a discounted rate because the Court found in that case that had the husband not separated from the wife, the husband's father may have been prepared to wait indefinitely for the loan to be repaid.

The above case shows that it is important that where family members provide a loan to each other, and where it is not to be a gift, the loan should be documented, and secured to the extent possible. The lack of security may be fatal to the question as to the enforceability of the loan.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Simon Creek
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