Sealing the deal: financial settlements and divorce
June 20, 2013 360 comments
So you’ve gone through the long and wrenching process of divorce and reached what for many is the final stretch: the financial settlement. This is where the courts set down the terms of the deal between you and your former partner in black and white. Once they have done so, the settlement becomes a binding ‘financial order’.
Financial settlements used to be called ‘ancillary relief’ because they were seen as ancillary to the main event, the petition for divorce. But I think the current name is much more fitting. Surely it is the financial settlement that is the main event? That is after all what is going to shape your and your children’s lives for however many years to come.
Generally reaching the financial settlement stage comes as a relief to divorcing couples. It is often the first point in the drawn-out end of the marriage when the former partners can begin can begin to think about the future, putting the hurt and acrimony behind them. Parameters have been defined and numbers discussed.
If you have reached this stage, whether you are the husband or wife, the wealthier party or the dependent one, there are some key points to bear in mind while the fine details of the settlement are finalised.
Firstly the children. The courts will want clarity about where and with whom any children will live so they can determine the size and type of housing required to meet their needs.
The length of a marriage is a central consideration. It will affect the size of the settlement. In law, a “short” marriage is one that lasted five years or less. A “medium” marriage is between six and 14 years. Thereafter a marriage will be regarded as a “long” one.
The family courts will need to see the budgets for both spouses and the children, with future income and financial needs set out in a sworn statement, called a ‘Form E’. Click here to see a budget worksheet, with the kind of information typically requested. It makes no sense to exaggerate or underplay your budgets when filing our your Form E. The judge won’t be impressed or swayed. Your future housing needs and income requirements are some of the most critical parts of your Form E, so investigate and do your homework before submitting this information to the court.
Your solicitors should be able to provide budgetary advice, but if not, our worksheet could be a useful starting point. If you have more than one child, car or property, a separate budget can be prepared for each if necessary. This means that the separate costs can be identified far more easily and clearly displayed.
When drawing up a financial settlement following divorce, the courts will take a long hard look at each spouse’s future earning capacity and may set this against their needs for financial support – ie maintenance – both before and after retirement. For example, can you go out to work if you haven’t worked for the last 10 years? If so, what will your position be and how much will you earn? What could you reasonably do? Will you need retraining? Can you work if there are young children to look after?
Each case is considered strictly on its own merits. A judge may decide that one person cannot reasonably be expected to work but require a mother with children work, even if only part time.
Much depends on the judge and the facts of the case, but it certainly makes sense to contribute towards your own cost of living if you are the dependent partner.
The court will also take new relationships into account. For example, if you are living with a new partner in their home, the court is likely to conclude that you have fewer financial needs following the divorce – or perhaps none at all. After all, some or all of your maintenance needs are being met. Remarriage will always end a claim for maintenance, but not for capital – for example, your share in the former marital home, if this has not already been resolved.
There is no one answer to how much should be paid. Each case, as mentioned, is judged on its own merits. In the interests of fairness, the courts need to carry out a detailed analysis of the family’s net worth, and also to assess how and when that worth was acquired. If that wealth is determined to be “matrimonial” it should be shared between the parties; but if it is “non-matrimonial” it could be excluded from the settlement. In the majority of cases though, this point is irrelevant, because there is barely enough to meet the parties’ needs.
Once basic needs have been met, how will the courts divide any assets left over? Increasingly the view is that ‘non-matrimonial’ assets – i.e. those not acquired in the course of the marriage – should be ring-fenced once reasonable needs have been met. What is “reasonable”, however, may vary from one case to another, and depends on the parties’ usual standard of living during the marriage.
One partner may be required to pay maintenance – or alimony as it is known in other countries – to the other less wealthy partner. In the majority of cases, of course, it is the husband who pays maintenance to the wife, but not always. When wives are wealthier than their former husbands, the men are just as entitled to support.
The courts reserve the right to extend the period during which maintenance must be paid – or not, as the case may be. Maintenance obligations may end if the recipient begins living with someone new (cohabiting), and will, as mentioned, automatically end if they remarry.
But in other cases, maintenance obligations will have no cut-off date and can only be ended on the orders of the court or if one of the former partners dies.
Such open-ended maintenance order can be ended by mutual consent. Both parties may agree upon the payment of a lump sum in lieu of future maintenance. Or they may agree that the time has simply come for the order to end, with the spouse who had been receiving support now able to manage alone.
A clean break
The law states that the financial obligations between spouses should cease as soon as possible after the end of a marriage. However, maintenance is paid to the former spouse after divorce when they require it. The actual amount to be paid will generally be agreed between the two of you, or by a court if you cannot reach agreement. But sometimes, when there is enough capital or money available to cover future maintenance needs, a “clean break” divorce may be possible.
In such arrangements, the courts make an order for a one-off payment, which relieves both parties of any future financial obligations to the other.
This is not a one-time-only option however. If you are in receipt of maintenance you can apply for a lump sum of capital at a later date, in place of the continuing payments. This is called “capitalisation of maintenance”.
A ‘clean break’ may not have been possible at the time of the divorce, as neither your or your former partner had sufficient capital. But years later, your financial positions may well have altered. The paying partner could, for example, have rebuilt their capital and be about to retire. If their overall income is about to drop, then they may wish to pay you off so, for example, they can hold onto all of their pension.
If you, like many people, end up paying continuing maintenance after a divorce , you may see lump sums as ‘grass is greener’ alternative, but actually this may not be the case. If your former spouse were to remarry, for example, your maintenance obligations will cease at that point. That could make maintenance a more cost-effective option.
Photo by Renee Suen via Flickr under a Creative Commons licence