Responsibility for debt in a divorce situation

[IamtheZombie]

DSD1 married in August 2010. Three weeks after the wedding she told us that she and her DH were going to have to declare bankruptcy as they had debt they could not afford to service. We went to visit them to discuss the situation and to see if we could help. We established that their overall debt amounted to approximately £55,000. After discussion I agreed to use some of my capital and lend them £40,000 to get their other debts down to a manageable level. It was further agreed that this loan would be interest free for a period in order to give them some breathing space.

In August 2011 we approached them with an agreement to start paying interest at 4.5% above base rate. It was at this point that DSD1 informed us that she and her H were separating. We basically said that this wasn?t our problem and that we had loaned them the money and that they needed to now start paying interest on the loan.

The agreement provided that the first payment would be due on 1st January 2012 and quarterly thereafter. It also provided that capital repayments could be made on an interest due date and that such reduction in the loan amount to be taken into account for future interest payments. No such capital repayments have been (or are likely to be) made.

After much chasing, the agreement was eventually returned to us at the beginning of November 2012. Without prior discussion with us, they had each noted the amount of interest they would be paying on a quarterly basis by their signatures (DSD2 - £300 and her H £200).

Our position is that this loan was made to them as a married couple and they have joint and several liability and that how they choose to carve up the interest payments is strictly a matter of convenience between them.

They are now proceeding to divorce.

How is debt dealt with in a divorce?

A couple of other points in case they are relevant:

My will provides for both DSD1 and DSD2 to receive a legacy of £40,000 with any outstanding loan balance(s) to be deducted from the legacy. As things stand right now, if I walk under a bus tomorrow, DSD1 would receive nothing and DSD2 would receive £40,000.

Son-in-law is up to date with his interest payments. DSD1 is 2 payments in arrears.

Neither of them have any assets.

Bit complicated as sounds as though you did not record the "loan" in writing at the time it was made. Is that correct? If so, is it fair to say that you are all agreed now what the terms of it are?

Re the divorce, all assets and debts are shared in the same way. They will have to declare them all on each of their Forms E. An order will eventually be made - either by consent or otherwise - as to how this loan should be paid off. The difficulty may come if your soon to be ex-SiL decides to say the loan was never a loan but a gift. Then it will be down to your word against his and the legal wrangling over that if fully contested could easily cost many thousands of pounds. If I were you, and if you have no formal loan agreement in place yet, I would be trying to get one in place pronto. You will need to make the Effective Date backdated to a date on or before the money was loaned to them. They must both sign it. Ideally they should have separate legal advice on it as they clearly now have divergent interests. However no lawyer will let your SiL sign an agreement like this now if there is any wriggle room so probably best for you to try and push it through by consent, i.e. "we have all agreed the terms and now need to record them formally so I have drawn up this agreement, please sign it."

Sorry to hear about the divorce.

Thanks, Peppin.

The first clause in the agreement is their acknowledgement of the circumstances under which the loan was made and that it was paid to them.

Clause 2 sets the rate of interest and the date from which it is payable.

Clause 3 sets out the repayment schedule.

Clause 4 provides for the repayment of capital as mentioned in my OP.

They both signed the agreement (eventually) with the only changes being their handwritten note as to how much each would pay quarterly.

The problem with this type of loan is that is likely to be seen by the court as a "soft loan", ie not strictly repayable unless there is documented evidence of what was agreed and what payments have been made.

If the court is minded to accept that the debt is to be repaid then it will be taken into account, ie notionally at least offset against their assets but you say that there are no assets at all??

If that is the case then the court has no jurisdiction to order either of them to pay within the divorce proceedings (but can record an undertaking), and you may end up having to sue them in a separate action if they don't pay up. That would be in the county court and entirely sep. to the divorce proceedings.

glad to see you've sorted your will out so that he other child isn't at a disadvantage if you don't see the money again.

Sorry x posted (ds rambling on at me before I finished)

Agree with Mumbles. Court cannot divide the loan between them, and you retain the right to pursue both for the whole debt. Beware though that you still cannot pursue a bankrupt for the debt.

Thanks, mumblechum1.

I think I've not been clear enough about what I really want to know. For that I apologise.

I doubt either of them will be in a position to make any capital repayments - certainly not in the foreseeable future. I made the loan knowing this (or at least knowing it would be several years before they could do so). But, I do need the income from the interest payments. What I don't want is to find myself in the position of one of them deciding to stop paying what they have agreed between themselves is their share of the interest without any recourse to the other party to the agreement. Perhaps in light of that being my only real concern the divorce is irrelevant in some ways. I just thought that the legal status of such a loan in a divorce situation might be relevant.

We want to write to both of them in the next couple of days setting out our position. I'm just not sure how we word that letter.

x-post, Collaborate.

At the moment, neither of them are bankrupt. SiL is in full time employment and is back living with his mother. DSD1 is unemployed and DZH is currently paying her rent. She is a beneficiary under her grandmother's will and it has been made clear to her that when we obtain probate and distribute the estate she is expected to repay him and to catch up on the missed interest payments to me.

Thanks, babybarrister.

I must say that I am relieved that the three posters here in Legal whose advice I trust the most are in agreement.

I forgot to include a thanks to you too, Collaborate. Please accept a belated one.

Oh, and mumblechum, I would never ever countenance treating the girls differently. They are both adults and have only been part of my life for a few years, but they are DZH's children and we are all part of a new family unit now.

I'm off to draft the letter now. Thank you all again.

, I'm sure you wouldn't, but it is something that loads of people just don;t think about like my parents