When Is A Loan A Loan?

Family law courts have a duty to equitably, and most importantly, evenly, divide all community property assets and debts. Pretty straightforward, right?

Well, one issue that comes up with remarkable frequency is loans that one party alleges must be repaid and which the other party alleges were a gift.

Consider this scenario: A young couple marries, and they want to buy a house. However, they do not have the down payment funds to do so. Where to get some money? Well, the wife’s grandmother has some money and wants to help. She gives them $20,000 for the down payment, and the house is purchased. Fast forward 5 years, and our happy couple is in the middle of a divorce.
Wife alleges that the money was a loan and that her por grandmother needs to be paid back. She says it is a community liability that should be split between the parties. She offers to pay that loan back and states that Husband should pay the $20,000 in credit card debt to even out the property division.

Husband, of course, objects, stating that Wife will never pay it back and it is simply a ruse to get him to pay all of the credit card bills, which WILL have to be paid.

What does the court do with this?

The court must determine if the money was a gift or a loan. The court must determine this as of the date the money was transferred, not afterward.

At the time the money was given, was it intended as a loan or as a gift? What signs will be considered?

First, the party’s testimony will be considered, but this can be less convincing then you might think—both parties have a motive for remembering the transaction a certain way, and a relative is usually involved. The court is going to presume they are going to try to protect their own flesh and blood.

Second, whether there is any writing at all from the time. This can be formal, or informal, and can be anything indicating that repayment of the money will be required.

Third, whether a payment schedule is established.

Fourth, whether there is interest on the amount paid.

Fifth, whether collateral was required.

Sixth, whether or not the parties had the ABILITY to repay the loan when it was made. A court is going to presume that money given that is extremely unlikely to be repaid is a gift, not a loan.

Seventh, whether any repayments were actually made.

Eighth, whether the parties to the loan conducted themselves as if it was a loan.

As you can tell, this is a very fact-driven analysis, and the issues must be litigated because the court can decide whether or not a community liability exists.

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