Dealing with loans from relatives in a divorce

The blurring of loans and gifts

Normally there is very little trouble in valuing a debt or establishing its validity. The obligee will send monthly statements with the amount due and take steps to ensure that regular and timely payments are made. However, this may not be the case when debts are owed to mothers, fathers, or other relatives. The problem with these obligations is that they may in fact be gifts or that there is no method or means available to distinguish them from gifts.

For example, assume that a father has provided $20,000 for his daughter and her husband to put a down payment on a house. There was no note acknowledging the debt, no interest specified, no payment on the note was ever made, and the father made no attempt to collect the debt. In this example, it is possible that the father had never intended to collect the debt and had intended it to be a gift. Alternatively, he may have treated it as a gift as long as he was provided due respect, got to see his grandchildren, and the daughter and son-in-law stayed married. In this situation, the father may change his position on the debt and assert his right to collect it in the midst of the divorce of his daughter and son-in-law. Naturally, this will complicate the divorce process.

Determining whether money was a loan or gift

The presence of the following items or provisions is an indication that an obligation is a true liability and should be included in the marital estate for resolution. The absence of the items indicates that the liability is a gift and should be excluded.

  1. An agreement by both parties that the debt is marital.
  2. Written document defining the obligation.
  3. Fixed terms of repayment in the terms of the obligation.
  4. The presence of interest due on the obligation outstanding.
  5. Regular payments made on the obligation.
  6. Involvement of a third party, such as an escrow company, in the management of the debt.
  7. Collection attempts by the lender.