Family Loan Repayments In Divorce

When people are married, they often receive help from family members. A parent will often pay for the down payment for a house, to make a loan to pay off credit card debt, or any number of other reasons.

The problem becomes, however, after a separation and divorce is filed, whether or not that loan will have to be repaid out of community assets.

To put the problem simply, the judge is usually faced with the following problems:

1. Lack of documentation. Most loans are made verbally, without formal loan documents.
2. Doubt as to whether the loan was a gift or not. Does the loan actually have to be repaid, or is it a ruse to get more money for one party?
3. If there IS a writing, was it executed BEFORE the divorce was filed, or after? Backdating documents is a pretty common practice.
4. Is the source of the loan funds actually traceable? Is there any documentary evidence of where the money came from?
5. Does a Statute of Limitations apply? Normally there is a 2 year statute of limitations to collect oral debts, and a 4 year statute of limitation on written debts.

The judge will basically be looking to see if there is proof of the loan and if it will actually have to be repaid. The judge will have broad discretion to determine whether or not it is a real debt.

Some factors that may make the debt unenforceable are no deadline for the money to be paid back, no monthly payments, no interest rate, and no writing signed by the other spouse stating that the money is owed.

As in all other areas of law, the more formal proof you have of a debt, the more likely it is that the debt will be enforced and paid back out of the community assets.

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