Hard and Soft Loans – What’s the difference?

When it comes to dealing with financial matters on divorce, we often come across the scenario where a family member has provided a sum of money to one or both parties in the marriage and there is a dispute about whether that family member should be paid back when considering a financial settlement.

Hard loan or soft loan: the evidence

The starting point is to look at the evidence available to establish whether a particular payment was a loan or a gift. In the absence of a formal written agreement, such evidence may be in the form of correspondence or perhaps bank statements showing evidence of capital advances and repayments.

It is also necessary to consider whether a particular loan is “hard” or “soft”. A hard obligation or loan should always be included when making calculations for financial settlements on divorce. Several factors could lead to the conclusion that a loan is “hard”. Credit or commercial loan agreements would almost certainly fall within this category. If there is a written agreement together with demands for payment and potential enforcement action, then the loan is likely to fall within this category.

On the other hand, loans from family or friends are usually informal arrangements and are more likely to be classed as “soft” loans. Even if this is the case, however, there is discretion based on the strength of the evidence available, whether to include or exclude these loans when calculating proposals for financial settlements on divorce. Where there is a dispute about a loan from a family or friend in financial court proceedings, it is possible for that third party to “intervene” in proceedings and make a claim.

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