Avoid losing your loan in divorce or bankruptcy: Legal tips from a commercial lawyer
As house prices soar, many Australian parents are stepping in to help their adult children buy their first home. The “Bank of Mum and Dad” has become Australia’s 10th largest lender, contributing over $35 billion with an average parental contribution of $92,000.
But what happens if your child’s relationship ends in divorce, or if they go bankrupt? Without proper legal protection, your generous loan could be lost.
Why It’s Crucial to Legally Document a Family Loan
Is it a gift or a loan?
This is the first—and most important—question the courts will ask.
In family law and bankruptcy matters, if there’s no written agreement, the contribution is often presumed to be a gift, meaning you may have no legal right to repayment.
Always Use a Loan Agreement
To protect your financial contribution, you should:
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Prepare a formal loan agreement (prepared properly by a lawyer),
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Clearly identify the transaction as a loan, not a gift,
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Include repayment terms, interest (if applicable), and security over the property.
How to Protect Your Loan if Your Child Gets Divorced
Divorce and parental loans are a dangerous mix.
In a property settlement, the Family Court assesses the asset pool and each party’s contributions. If your loan isn’t properly documented, it could be:
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Treated as a gift, increasing the asset pool to be shared,
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Divided between your child and their ex-partner,
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Difficult or impossible to recover.
Solution: Secure the Loan
To strengthen your position, engage a solicitor to register a mortgage or caveat on the property. This creates a legal interest that the court can’t ignore. You will be elevated to the position of a secured creditor. This means you will be paid first, along with other secured creditors.
What Happens to a Family Loan if Your Child Goes Bankrupt?
Bankruptcy laws favour secured creditors.
If your child becomes insolvent, all their assets vest with a bankruptcy trustee. If your loan is unsecured, you’ll be treated like any other low-priority creditor.
Secure Your Interest
By having your loan written up as a legally enforceable loan, and registering a mortgage or caveat, your loan becomes a secured debt, giving you priority in the repayment process. This is critical in protecting your financial position.
Additionally, large gifts made within 4 years of bankruptcy can be clawed back by the trustee. This is another reason to avoid classifying your support as a gift. It also means you need to put this in place before you need it. Leaving it until the first sign of trouble may be too late.
