We commonly see transactions where family members lend money to their own family to help them buy a property or for some other purpose.
In these circumstances it would be best to secure the loan by having the borrower acknowledge the debt and provide security in the form of a registered mortgage. I don’t know whether it’s due to the lender being embarrassed about trying to formalise the transaction or if its more a “she’ll be right” type of attitude, but more often than not nothing is ever formally recorded or documented.
This can cause problems for the whole family. What if the borrower, through no fault of their own loses control of the property or business through bankruptcy or marital breakdown? Will other family members believe the borrower is being given preferential treatment? What if the borrower later denies the loan and asserts it was always intended to be a gift – how will you or your estate prove otherwise?
Bankruptcy of the Borrower
A problem will arise upon the bankruptcy of a borrower where no security has been granted to the lender. In this case the funds won’t be staying in the family. You won’t even be protected where there has already been a transfer of the borrower’s real property to the lender as attempts to repay old debts with current transfers are likely to be set aside. In essence, a late transfer of property in payment of a debt, where there is no security over that property, is likely to be challenged by a trustee in bankruptcy.
The new PPSA legislation will most likely cause further problems in these situations as well. If any security is not registered in accordance with this legislation, proof of ownership could also be under question.
If you are considering or have loaned money to family members you should properly document the loan and take security by way of mortgage. Solicitors can be engaged for a modest fee to help ensure your interests are protected. A mortgage taken at the time for proper consideration will prevent a trustee in bankruptcy taking the security or the Family Court including the security as a part of the matrimonial pool of assets.
Whilst it might seem too formal for a family transaction it’s far better to take steps which will keep the money in the family.