How are Loans During Marriage Handled in Divorce?

March 27, 2024 | By Doppelt and Forney
How are Loans During Marriage Handled in Divorce?

In a divorce or legal separation, loans from parents are almost always difficult issues. In the past, the preferred strategy was [for the spouse whose parents gave the money] to characterize it as a loan. In this way, for purposes of the family law case, the parents would assert that they were demanding re payment.

The counter argument was that the other spouse would take the position that the funds were a gift. The counter argument continued that, even if the money was repaid, the would go back to the other spouse in the form of a gift. In many family law cases in San Diego, the funds were given so long ago that the loan would be uncollectible which is a consideration in family law court and needs careful analysis.

For example, if the loan is documented on a written instrument, then this is evidence of the validity of the loan. Non written loans are normally not considered. The statute of limitations for enforcement [time period to bring a legal action to enforce the loan repayment] is four years under California Code of Civil Procedure Section 337. If the obligation is not in writing and is oral, then the statute of limitations is two years under California Code of Civil. Procedure Section 339.

Although the statute of limitations does not extinguish the obligation, it does bar enforcement if raised. Many Judges in San Diego Superior Court take the legal position that only debts which can be enforced should be considered in the division of debts in the community property estate. If the debt is uncollectible, then many family law Judges do not grant credit in the division of property.

For the present, for funds given by parents after January 1, 1984, the preferred strategy is to prove that the money was a gift to one spouse from their parents. The reason is that California Family Law Code Section 2640 allows reimbursement for traceable separate property contributions to the acquisition of a community property asset. In this way, if the asset has value, then a reimbursement claim can be made. Each case is different and will need a complete and comprehensive analysis.

What Are Some Of The Factors Does A San Diego Superior Court Judge Consider?

The first consideration should be the testimony of the parents and spouses. A Judge can make an order on testimony and this can be very powerful. The testimony should concentrate on the circumstances and facts surrounding the receipt of the funds.

This may well be the best indicator of the character [loan versus gift]. Below is a partial checklist which may assist you , your attorney and the Judge, in determining whether the payment was a gift or loan. There are cases which are very complicated and may need a forensic CPA.

  • On the check, who was the payee?
  • What were the check proceeds used for? Were the check proceeds used in the intended manner?
  • Was a tax return [gift] filed?
  • When was the money received? If on a birthday or holiday, such as Christmas, then this may be evidence of a gift.
  • Past history of gift giving either annually or recurring?
  • Were any similar payments made to other siblings or half siblings?
  • Is there a promissory note? Is there another writing which exists? If there is, has there been enforcement? Were any payments made per the writing or promissory note? Were any payments ever demanded per the promissory note or writing?
  • If it were a loan, would it still be enforceable or has the statute of limitations passed?

How Can A San Diego Family Law Firm Help With Your Case?

The law firm of Doppelt and Forney, APLC can assist with parent loans or gifts in the context of the family law case. Their firm offers a confidential and complimentary virtual consultation up to thirty minutes with an attorney to discuss the specifics of your case.