Parents will often loan their adult children funds to assist in building a new business or purchasing their first property. Unfortunately, family relationships occasionally break down and the parties need to know where they stand and what their rights are to recover the funds.
Forgiving the Debt
The child (the borrower) will often say that the lending parent forgave the debt.
If there are no documents, a Court will determine whether the funds were forgiven or not depending upon the memory of each party and their creditability in the witness box. This is a classic “he said, she said” dispute.
If there are no formal documents signed or registered, an informal forgiveness of debt in writing will generally be an effective defence.
In contrast, if the parent registered a security interest against an asset, the lender is required to formally discharge the loan in the correct format and the forgiveness of debt may be challenged.
If you are considering assisting your children with a loan, consider:
- Discuss the loan with the borrower to reach an agreement on the key terms and conditions of the loan including whether any interest is payable, repayment dates and the term of the loan. Discuss whether the loan will be secured by any asset such as a property or an asset of the business. This must be done at the time the funds are provided;
- Document the agreement;
- Seek legal advice. A solicitor can assist you to secure the loan by registering a mortgage or a security interest over an asset. Although this requires some initial costs upfront, it will greatly impact the parent’s ability to recover the funds later; and
- Discuss the loan with other interested parties. Often parents with more than one child make loans to one child. In our experience this encourages future family disputes, depending on what has been promised to different family members.
If you are concerned that you have previously loaned moneys to family members without the appropriate documentation or are considering making a new loan to family members, please contact our Commercial Team to discuss how we can assist you to protect your rights and position.