Counting the cost of a divorce settlement

May 23 2007 by Bill Gleeson, Liverpool Daily Post

When marriages break up, they can be a costly way of losing hard earned cash. Bill Gleeson highlights some of the financial pitfalls.

YOU may have spent your working life building up some personal wealth, but there is a certain way to lose it all again: divorce.

The finance of legal fees during divorce proceedings are today very much in the spotlight, largely due to a number of high- profile divorce proceedings making the headlines. Just ask Sir Paul McCartney or Chris Tarrant.

Divorce can prove to be a good way of losing all that hard earned cash, whether it was the man or the woman who earned it in the first place.

Funding is an issue that affects both the very wealthy and those of more modest means, although the challenges are rather different for each group.

The financial disparity between a working spouse and non-earning partner could leave the latter with difficulty accessing the quality advice that he or she will need to ensure a just settlement.

Unfortunately, experience dictates this is mainly, although not exclusively, a problem faced by women.

As anyone unfortunate enough to go through a divorce will testify, it is one of life's most stressful experiences. So when people are dealing with the emotional trauma of the break-up of their marriage, the added complication of having their finances disrupted is something that they could well do without. Divorce is expensive – good lawyers do not come cheap, after all.

FUNDING issues can arise quite quickly in the divorce process; savings can soon be eroded because the family’s wealth has to fund two homes instead of one, when everything was blissful. Most financial institutions will remain impartial but have to be mindful of the inexorable rise in personal borrowing and the difficulty of funding two households from resources that previously funded one. Consequently, at a time when finances are already stretched, it can be difficult, or even impossible, for many to fund the legal expenses of the divorce from existing resources.

The impact of separation can be significant, particularly where proceedings become acrimonious. Once a financial institution becomes aware that a couple is separating, credit and account cards may be withdrawn and existing mandates on jointly-held assets are usually rescinded. Where one party has a high income or substantial assets in their own name they may try to use this financial disparity as lever to apply pressure in negotiations.

Savings can therefore be quickly eroded by general living costs, even before the first legal bills arrive on the doormat. The stress of mounting bills and rising debt can be too much for some, leading them to give up the fight, and potentially not achieving the best possible settlement. Although the legal representative wants to be as supportive as possible in their role, they still have the responsibility of ensuring their firm's costs are met.

Paul Scott, a private banker with Coutts’s Liverpool office said: “It is sensible for the client to seek advice on the financing options as soon as possible. The reluctance of individuals to take on additional debt at this time is understandable, as they prefer to rely on their savings where possible. Very often, it is only when savings have been eroded that the client seriously considers the alternative options. An application for a borrowing facility to pay legal fees is, however, much more likely to receive a favourable hearing if the applicant has some resources available to them to cover their day-to-day living expenses.”

HOWEVER, the financial jolt can still be much harsher than people expect. One factor is that people are marrying later in life and are older when they divorce. According to official figures, the average age of divorcees has risen to 43.1 years for men and to 40.6 years for women (*Source: Office of National Statistics – 2005). Consequently, many couples will have far more complex financial affairs than in years gone by. People who have enjoyed a comfortable married lifestyle can suddenly find themselves under severe financial pressure while the divorce settlement is being resolved.

Mr Scott said: “From a lender's perspective, sanctioning of borrowing facilities immediately following the separation can be problematic due to the difficulty in establishing the marital assets. A lack of information about these matters means that it can be hard to make an estimate of the likely level of settlement at this stage. Lenders, therefore, are heavily reliant on the solicitor's assessment of the costs to be incurred, the progress of the case and the likely outcome.

Ascertaining the nature and size of the assets can be a particular issue for wealthier couples who may have used offshore funds, trusts and bank accounts in addition to a diverse range of liquid and illiquid assets held onshore. Other problems can arise, for example, when trying to place a value on private company share- holdings or the value of a partner's pension entitlement.” Tracking down assets themselves can be difficult, especially if one partner has controlled the family's finances.

Matters can be further complicated if there has been non-disclosure or an attempt to move assets – cases of one party cleaning out the joint bank account are not unknown. All of this can result in the legal costs mounting, while further specialists are employed to seek out where the assets are held or provide valuations.

So, amid all the turmoil, how can a lawyer ensure that someone going through a divorce can afford to live and to pay their legal fees pending settlement? There are a number of funding options, including taking out a loan from a High Street Bank, seeking funding through Legal Aid or borrowing from friends or relatives. Other potential options are detailed below which may be more appropriate for High Net Worth individuals.

SPECIALISED LENDERS

There are a small number of private banks, such as Coutts & Co, that specialise in this area. Generally, they will only become involved in high-value cases where there is likely to be a substantial settlement and in high-value cases where the borrowing is too large for others to consider.

Specific requirements vary from lender to lender, but essentially each is heavily reliant on the opinion of the acting solicitor as to the likely outcome of the case. Some firms will insist on a charge on the matrimonial home even where it is owned jointly, but this is something that others, like Coutts, may not insist upon. Fees may be deferred or rolled up within the facility, as might interest, if agreed with rates that are very competitive compared to other forms of borrowing.

Particularly in high-value cases, a client may require borrowing to support lifestyle expenditure over and above that required to pay legal fees. Although this is not available from all providers, it can be helpful to justify a client's expenditure needs. Additionally, it can be used to refinance existing, more expensive borrowing such as credit cards, which can reduce outgoings.

These specialist institutions are usually private banks that are seeking to assist clients in cases where the level of liquid assets post settlement, after allowing for housing needs and repayment of borrowing, is likely to exceed £750,000 – £1 million. In today's climate this is not uncommon. However, for smaller cases, where the bank is part of a larger institution, these can be referred to other parts of the organisation.

Solicitors wait until end of case

One option is for the solicitors to not charge their clients’ fees during the proceedings but to bill them at the end of the case, taking their fees out of the settlement. Most solicitors’ firms would be reluctant to do so, as lending money to clients will affect the firm's cash flow.

There can be no interim billing and the solicitors will need to fund the disbursements themselves, including any Counsel's fees. This is clearly not an option that many solicitors will offer their clients.

Being awarded costs

In some cases, it may be obvious from early in the proceedings that the other side will have to pay some or all of the client's costs. The client's solicitors would still be in the position of having to wait for the proceedings to be concluded before receiving their funds, which many will be unprepared to do.

Selling assets

Some clients may be able to sell assets to fund the litigation. However, they will need the consent of the other party if the asset is jointly owned. It may also not be good financial sense to sell a particular asset, particularly perhaps if it is a policy nearing maturity, but is cashed in early as a necessity.

Where a policy is owned solely, one option could be to borrow funds from a bank using the policy as security. Similarly, some clients sell the former matrimonial home early in the proceedings to access cash, then both parties may have to pay rent whilst the housing market is potentially still rising, and the house may have been worth more, had it been retained for a while longer.

Post Settlement

Where clients obtain a clean break settlement, or any lump sum settlement whether a clean break or not, irrespective of whether he or she has borrowed to fund legal fees, it is important that professional advice is taken on the investment of their settlement.

It is likely that this will be a one-off capital injection that is unlikely to be repeated. It needs to be invested wisely to help as it will need to last for the individual's lifetime. Where clients do not have existing financial or "appropriate" advisers, or where they are looking to make a clean break from those used when they were married, solicitors can help by making introductions to appropriate firms.

Clearly the financial upheaval faced by the client means that he or she should not be rushed into any hasty decisions. After all, priorities and requirements may be very different a year down the line. One exception to the rule, however, concerns pensions as a pension arrangement will need to be in place to receive any benefits that are to be transferred as part of a pension splitting order.

For high-value cases, there will be many advisers who would welcome the opportunity to assist the client. However, having had their trust broken by the person closest to them, it may take some time before an individual feels comfortable taking advice from a third party.

Private banks are well-placed to assist as they are looking to generate a long-term relationship with the client and will not rush the client into long-term solutions. Flexibility is the watchword and for most, in the early stages at least, the main focus is optimising returns from cash and cash based investments.

When the client is ready to consider a longer-term strategy, they work with clients to develop a solution that utilises a broad range of products and services, tailored to meet their risk and return requirements.

billgleeson