You’ve been served: A look at the growing trend for divorce loans

Divorce law in England and Wales is set for an overhaul. New rules announced yesterday will prevent one partner refusing a divorce when the other partner wants one.

It’s hoped that the reform will speed up “no-fault” divorces, allowing couples to split with less acrimony, and ending what justice secretary David Gauke described as the “blame game”.

But change is also afoot when it comes to financing divorce proceedings, because there’s a growing trend for what’s known as “matrimonial finance”, which is essentially a loan that aims to make the process easier and fairer for both partners.

It goes without saying that divorce can be one of the most difficult times in a person’s life. Aside from the emotional turmoil for all involved, including any children, it can prove very expensive, particularly where legal fees are concerned.

According to Aviva’s latest Family Finances Report, UK couples end up spending an average of £14,561 in legal fees and lifestyle costs when they divorce. In our experience, this figure is more likely to exceed £30,000 in London.

So where does that leave those who can’t afford to pay the legal fees?

Since 2012, legal aid has been drastically cut in private family law cases. Now, only cases involving allegations of domestic abuse and other strict criteria are potentially eligible to receive financial assistance.

While the government is currently reviewing the legislation, it is extremely unlikely that it will revert back to the levels we saw before 2012.

This has left divorcing parties with limited options when it comes to proper representation, and a lack of proper representation ultimately puts a fair settlement at risk. By the same token, in the last six years there has been a significant rise in “litigants in person” in the family courts – that is, spouses representing themselves without a lawyer involved.

Although this certainly saves on legal fees, it can make the whole process far more emotive and stressful, and could even prolong proceedings.

Generally speaking, the starting point for negotiation between divorcing couples in England and Wales is an equal split of the matrimonial assets. However, there are, of course, many factors that can skew the negotiations in favour of either party, which is why professional legal representation is important.

Most people do not have savings just to cover the eventuality of getting divorced. And in many cases, one spouse will be financially dependent on the other. For example, they may have been fulfilling the role of the stay-at-home parent, suffered ill health, or might have supported their partner through building a business.

When a marriage does breakdown, this can lead to finances being cut off or heavily reduced for the dependent spouse. Therefore any personal funds are normally directed towards household bills, school fees, and on maintaining some quality of life during divorce proceedings, leaving little or nothing for legal fees.

Years ago, people often turned to their bank to look for financial assistance during their divorce. But with the current economic climate and stricter lending criteria, getting finance through financial institutions is no longer a viable option.

This type of borrowing also usually requires you to pay off the loan each month, making it very difficult for those who do not have a regular income.

You may think that turning to family or friends is the next option. But this comes with risks, as this type of loan may be considered a “soft” loan, and may not be taken into account by the courts when determining settlement.

With all this in mind, it’s perhaps not surprising that matrimonial finance has become increasingly common. In effect, this is a specialist loan that covers the cost of legal fees and disbursements throughout the divorce proceedings, which is then paid back after a financial settlement is agreed.

Unsurprisingly, many of the individuals that seek matrimonial finance are the less financially dominant ones, and the loan therefore gives them the chance to have appropriate and sufficient legal advice and representation.

During the divorce proceedings (which typically take 12 to 18 months), the client is only charged interest monthly on the drawn down amount. The capital is repayable only when the divorce settlement comes through.

These loans prevent one spouse from being reliant on the financially dominant partner to pay their legal fees, such as through a Legal Services Order, therefore giving clients and their lawyers an element of control over the direction of the case.

Given that both parties are equally represented, it also diminishes the opportunity for the financially better-off spouse to control and coerce the proceedings.

Interestingly, these loans can sometimes encourage an earlier settlement, particularly if both parties acknowledge that it isn’t worth depleting their shared assets by prolonging proceedings.

As this option has grown in popularity, there has been a significant increase in the number of specialist matrimonial finance providers over the past few years. Most providers offer loans that clients have to pay back at the end of proceedings, while others require clients to offer collateral as security.

Some providers will only offer loans to cover legal fees up to £35,000, and some won’t consider anything below this level.

There are now endless variables between the providers, giving individuals greater choice.

You can also now be matched with a provider that is suitable for your individual case and personal circumstances.

While it is clear that matrimonial finance is an evolving market, companies operating within the matrimonial sector must prioritise their clients’ needs ahead of profits.

But most importantly, these loans should bring symmetry to the proceedings, ensuring that both parties have a high chance of success in achieving a fair settlement.