Keeping it in the family? Still put it in writing

Lending money to a family member, particularly a son or daughter, may seem like a simple solution to help out with their financial endeavours. These situations often arise when someone is purchasing a new home, starting up a business, or in need of assistance to pay off debts.

While many people may not get around to putting a loan in writing, the importance of fully documenting financial assistance to a family member cannot be underestimated. The relatively small cost of registering a mortgage to secure a loan, or receiving advice from a solicitor on proper documentation of a loan, may avoid significant problems down the track.

For example, if someone files for bankruptcy after receiving an unsecured loan from a family member, this loan often cannot be repaid despite there being existing finances to do so.

Even in cases where the bankrupt person attempts to repay the loan by transferring an asset such as their house to their family member, this can be set aside by the trustee in bankruptcy. The courts do not consider a past loan to be effective consideration for the newly transferred asset. However, a mortgage registered at the time of the loan for proper consideration cannot ordinarily be challenged.

Issues such as these are on the rise, with recent articles in both The Age and the Wall Street Journal discussing the pitfalls of lending money to family members. While they suggest avoiding family member loans unless absolutely necessary, there are steps that can be taken to prevent a fall out in the ensuing months or years.

In particular, ensuring you have proper documentation for all loans given to family members can remove the possibility of financial loss stemming from a well-intentioned but unsecured loan.

To avoid financial troubles arising from family member loans, it is recommended that you:

· Consider the full implications of lending money or going guarantor on a loan;

· Take security for your loan by registering a mortgage at the time of lending your funds; and

· Seek legal advice to correctly document and execute the loan.

For more information or advice on documenting a loan, please contact Certus Legal Group.