Family Loans: A Common Arrangement That Can Lead to Unexpected Problems
Many Australian parents help their children financially by lending money to purchase a home, start a business, renovate a property, or simply get through a difficult period.
Often parties understand the importance of having a written loan agreement which can protect the family money in the event of a relationship breakdown or bankruptcy however families do not often understand that after 6 years enforcement of the loan can be statute barred, meaning the lender may lose the legal right to recover the debt through the courts.
What Does “Statute Barred” Mean?
In Victoria, most actions to recover a debt must be commenced within six years of the date the cause of action arises under the Limitation of Actions Act 1958 (Vic).
If court proceedings are not commenced within that period, the debt does not disappear, but the lender may be prevented from enforcing repayment through the courts because the claim has become statute barred.
This causes problems for family loans that have no clear repayment date (eg they may be repayable upon demand) or for family loans that have a repayment date but the repayments are not actually made or enforced until something happens (like a relationship breakdown).
How Can the Six-Year Limitation Period Be Restarted?
Before the six-year limitation period expires, the borrower can effectively restart the limitation period by acknowledging the debt.
An acknowledgement can occur by:
- making a payment towards the loan (even a relatively small payment); or
- providing a written acknowledgement that the debt remains owing.
Once a valid acknowledgement is made before the limitation period expires, a fresh limitation period generally begins to run.
The Danger of Informal Family Arrangements
Many parents assume that because the loan is “within the family”, there is no urgency in documenting repayments or keeping records.
Unfortunately, years can pass very quickly.
Parents often discover the issue only when:
- they require repayment to fund retirement;
- they become involved in estate planning;
- one child disputes the loan after a parent’s death;
- siblings argue about whether advances should be brought into account as part of an estate; or
- a child separates from their partner and the loan becomes relevant in property settlement proceedings.
By that stage, if there has been no payment and no written acknowledgement within the relevant limitation period, recovery of the loan may be significantly more difficult.
Practical Steps to Protect Family Loans
If you are lending money to a child or other family member, consider:
- preparing a properly drafted written loan agreement;
- clearly recording when repayment is required;
- keeping accurate records of all payments;
- ensuring any repayments are documented;
- obtaining written acknowledgements of the debt at least once every 6 years; and
- reviewing older family loans before six years have passed without any acknowledgement.
Taking these simple steps can preserve your legal rights and reduce the likelihood of costly family disputes in the future.
Oakhill Lawyers Can Help
amily loans often involve both legal and emotional considerations. Proper documentation at the beginning can prevent significant disputes years later.
If you have lent money to a family member, are unsure whether your loan may become statute barred, or need assistance preparing a family loan agreement, the team at Oakhill Lawyers can provide practical advice tailored to your circumstances.
Contact Oakhill Lawyers to discuss how to protect your interests before valuable legal rights are lost.
Disclaimer: This article is general information only and does not constitute legal advice. Every family loan is different, and limitation periods can depend on the specific terms of the loan and the surrounding circumstances. You should obtain legal advice about your particular situation.
