How to fund your divorce. By Nick White.
May 31, 2012 5 comments
Marilyn writes: This blog receives many visits from people who have questions about how to fund a divorce, or who seek information about potential sources of funding. Concerns about how to fund a divorce are the main reasons some people (mainly wives) choose to go it alone without a solicitor, thinking they are being cost-effective. But this is short sighted. The truth is that failing to take good legal advice and acting on that advice can cost a client dearly, not only in the short term during the process but long after the proceedings are over when that client’s lifestyle will have been needlessly and irreparably altered. How easy is it to obtain short-term funding of a divorce over the average six to nine months it takes for that divorce to be concluded, when all the costs are met out of the overall pot?
Given that the costs of a divorce can range from hundreds of pounds in the most straightforward of cases, to several hundreds of thousands of pounds depending on the complexities of the overall work, the short-term problem of funding those costs does need to be weighed against the benefit of the overall sum likely to be received on divorce. So clients need to think commercially about how costs will be paid while the case is ongoing.
Solicitors are prohibited from entering into conditional “no win no fee” arrangements in family law, and will rarely agree to be paid out of assets at the end of the case. Law firms aren’t banks, don’t build interest into their fees, and their firms’ outgoings need to be met each month. It is worth finding out how much your case is likely to cost, agreeing from the start how to pay and if possible, sticking to that arrangement. Ask your solicitor at the first meeting for an estimate and discuss how the projected costs can be paid.
According to a recent report in the FT, about the launch of a new divorce litigation fund apparently targeting a return of 8 per cent to investors, “the demand for lending is amazing” But why should that be… and is it a good option for a client?
I asked Nick White, Head of Stowe Family Law’s forensic accountancy department, to investigate and to provide readers with a rundown of the various sources of funding that may be available to them, should they seek to divorce. This is a lengthy post but there are many different options, so don’t be daunted. Here Nick considers the pros and cons of some of them.
It is frequently spouted in the media that banks are not lending, but is that true?
In April 2006 the courts adopted the general principle that each party pays their own costs. This has led to banks offering dedicated litigation loan products for family proceedings. However with a few exceptions (mostly for big money cases), these have been withdrawn. The banks’ general withdrawal from the market has led to a gap that businesses such as Novitas, the divorce fund featured in the FT, are seeking to fill.
As Marilyn notes, the cost of divorce proceedings can range from a few thousand pounds to hundreds of thousands of pounds for a big money or complex case, or sadly, when the parties are at war and refuse to settle commercially. Ultimately the cost of the proceedings, whatever that amounts to, is paid from the parties’ own assets.
Let’s take a typical 50:50 case, when the costs are taken out before the pot is divided. This means that each party will, effectively, pay 50 per cent of the total costs incurred. You would think that it would make sense for the parties to behave in a way that minimises the total costs. Unfortunately this is not the case when the parties’ personal attitudes to the proceedings and to each other gets in the way of commercial decision-making. The wealthier party may gamble, piling on pressure in hope of forcing the other party to settle for less, circumventing investigations into the real wealth of the family. Such attitudes can manifest themselves in a refusal to use joint funds or one party’s funds for the proceedings. This means that one party, often the wife, is left seeking external funding.
For many would-be divorcees, Legal Aid is simply not a realistic funding possibility. It is soon to disappear altogether for family cases and for most people, the eligibility criteria for obtaining legal aid are just too low. So if you do happen to be eligible for Legal Aid, take it up! It won’t last for ever and interest will no doubt be added to the debt, but as a funding option it is worth serious consideration.
If you are not eligible for Legal Aid, however, all is not lost. There are many sources of alternative funding available to parties involved in divorce proceedings, although they are not all available to both parties in equal measure. I have set out some of these below, in approximate order of total financing cost.
1 Soft loans from family and friends.
In our experience these loans are usually made interest free, and with no fixed date for repayment. There are pros and cons to this. For example, a loan is included as a liability on ultimate division of the matrimonial pot. But a soft loan, particularly from close family members, is often treated as a gift. This can result in further costs being incurred in pursuance of argument on that very point, which then further increases the costs involved in the proceedings. At the very least a loan agreement signed by both parties, prepared by solicitors acting for both parties should be put in place and possibly security taken to cover the loan.
2 Bank accounts, savings and investments.
Bank accounts in joint and sole names will rarely pay any meaningful rate of interest at the time of writing, so the loss of any interest is a negligible cost. This might be a good source of funding and will be taken into account in the schedule of assets and liabilities.
Savings and investments will generally provide a greater return than a bank account, but these are still likely to be modest when considered against the cost of borrowing. Advice should be sought however as to which investments to cash in, to ensure that tax liabilities are minimised.
3 Remortgage of property.
Additional security must be provided, so there is an inherent risk if the loan is not repaid. However one advantage of this option, assuming there is sufficient equity in a property, is that the loan can last beyond the duration of the proceedings. The interest rate should also be modest, at least in the present climate.
Remortgage finance may not be available when there is insufficient equity in a property, or when the property is in joint names and the other party does not consent to the remortgage.
4 Personal bank loans.
These may typically be obtained from a high street bank, with an APR of about 7 per cent upwards. However the actual rate will be dependent upon circumstances. The loans are for a fixed period. They may carry an upfront arrangement fee, but will typically be up to £25,000. Their availability is highly dependent upon the individual’s ability to repay on a capital and interest basis from income or other capital resources. It is possible to have the interest rolled up until the debt is repaid.
Personal loans of more than £25,000 remain available from private banks and from the wealth departments of high street banks. In our experience this is find this is a common source of funding, but the interest rate needs to be acceptable to the client who is advised independently. Such loans are generally only made available to persons who the bank hopes will invest a substantial portion of their settlement (think: six figures) with the bank upon receipt. The bank will require an irrevocable undertaking from the solicitor and the client to ensure that on payment their debt will be paid. The solicitor’s bills will then usually be paid monthly, direct from the bank, after the client confirms to the bank that payment should be made.
5 Loan finance from other institutions.
Loan finance may also be available from organisations such as Novitas, the divorce litigation fund featured in the FT. However we have noted from the company’s website that security will still be sought – or at the very least, an equitable charge over property.
For a more in-depth examination of third party loan finance, see Marilyn Stowe’s post here. There is also the very important issue of the overall cost when obtaining this type of finance, including the interest rate. Before entering into such an agreement it is essential that the client takes independent legal advice.
6 Credit cards.
If the balance cannot be cleared on a monthly basis, a credit card is an expensive source of finance and overall is best avoided for use in family proceedings. It is doubtful these could be used to any great extent for most people, because of the generally limited funds available. However certain credit cards do have large credit limits and might be an immediate – albeit short term – answer if proceedings are being instigated. If the credit card is in joint names, its use might also serve to galvanize the other spouse to assist with funds.
Rates of 0 per cent can still be obtained for some credit cards, albeit rarely and should only be used if a meaningful credit limit can be obtained and the case timetable will allow for repayment of the debt within the 0 per cent period. Eye-watering interest rates may follow if repayment is not made by the end of that period.
7 Sears Tooth Agreements.
Under a Sears Tooth Agreement, the client irrevocably agrees by deed to pay the solicitor’s fees from their capital settlement at the end of the case. An interest charge will be made. You can find out more about Sears Tooth Agreements here.
They are by no means freely available. Solicitors know they are very risky, given the potential risk of non-payment if the settlement doesn’t materialise, for example if the paying party defaults or goes bankrupt. Sears Tooth Agreements do not cover income (maintenance) awards and where other debts need to be repaid by the client to the paying party, the solicitor’s fees are likely to end up bottom of the heap.
8 Maintenance Orders.
There is another, rather obvious source of finance, and that is by the paying party to the proceedings. All too frequently we find that the paying party – particularly when he or she has access to liquid funds to pay their own legal fees – will oppose the use of joint funds or a remortgage of the family home. This opposition is in the name of tactics, to try and force a poor settlement on an unwilling recipient.
Such a tactic will compel the client to seek relatively expensive finance elsewhere, or issue an application for maintenance to fund ongoing legal costs. Such an application first requires the client to apply for external funding, usually from one or two potential lenders. Only when that is refused can the client proceed with the application to court. (At the time of writing, sections 45-46 of the new Legal Aid, Sentencing and Punishment of Offenders Act provides in detail for such an application, with all the factors the court must take into account in making an order, but it is not yet in force.)
Those failed applications for credit may subsequently affect that person’s ability to obtain credit in the future, by marking his or her credit record. However, if the court is satisfied the other party can afford to contribute, it will make an order for interim maintenance payments sufficient to cover the assessed monthly legal fees, although this may be initially only up to FDR stage.
The order would provide for a substantial monthly income payment, which could also be backdated to cover all legal fees. It could also provide for the costs of the application itself to be paid. It can therefore be a swingeing financial hit against the wealthier party, to redress the balance. Once the poorer party receives funding, it is amazing how some cases settle swiftly…
One understands the reasons for the other party’s refusal to assist with the provision of finance, but ultimately, from a financial perspective, it is a false economy. The arrangement fees and interest costs, as well as the costs of the resulting application for maintenance pending suit, will merely serve to reduce the total asset pot. The result is that both parties suffer financially.
In fact, in a case where one party’s needs have to be met it frequently occurs that the sum to be paid out by the dissenting party will mean that he or she will end up paying an interest cost that is far higher than it would have been had that person consented to the pragmatic financing solution in the first place.
To conclude, where security can be provided or where an income can support a personal loan, litigation funding can be arranged. Clients should always bear in mind that loans have to be repaid, either on settlement or thereafter depending upon the type of finance. Ultimately the parties pay for both sets of legal fees from their assets. It is almost always the case that when funds are available to the parties from their own resources, it proves to be the cheapest form of finance. It is unfortunate when personalities, emotions and agendas get in the way.
Pragmatism in terms of approaching the payment of fees often results in a more cohesive and commercial approach to the resolution of the whole proceedings with the result that legal fees are much less than they would otherwise have been, to the benefit of both parties.
May 31, 2012
Categories: Finances and Divorce