Divorce finance: choosing the right litigation funding structure

Prompted in part by the case of Owens v Owens, the new legislation will mean that a spouse can simply state that the marriage has broken down irretrievably, where previously there had to be allegations of adultery or unreasonable behaviour for proceedings to start.

 

There are many misconceptions when it comes to divorce law, with individuals mistakenly believing that being able to demonstrate the other party’s shortcomings and misdemeanours will lead to an increase in their financial settlement.

 

This is extremely rare; in reality, the only things they are likely to increase by doing this are legal fees and acrimony. 

 

The financial element to a divorce can be a source of great stress at an already emotional time.

 

Cuts to legal aid haven’t helped matters, as many have opted to represent themselves, or have turned to family or friends for a loan. 

 

The latter carries the risk that courts will perceive it as a ‘soft’ loan, meaning it may not be taken into account when determining the settlement. 

 

Another financing route is via a Legal Services Order, which orders one former spouse to pay the other’s legal fees, however this can cause significant delay and expense and divert the focus away from the main proceedings. 

 

It is, therefore, unsurprising that an influx of specialist litigation funders have entered the market recently, all with different approaches and experience.

 

Litigation loans can put a fair outcome within reach of an individual who may otherwise have been unable to access legal advice of a similar calibre to their former spouse’s. 

 

 

A litigation funder should be FCA-regulated, meaning they have an obligation to lend responsibly, and so will only lend up to a certain proportion of the client’s likely settlement outcome. 

 

It’s important that solicitors understand the different charging structures and know which will work best for their clients, especially as the ‘true cost’ to the client can be complex to grasp. 

 

The majority of lenders provide a maximum facility for the borrower to draw down from once invoices for legal fees become due, and interest is charged solely on the amount drawn down. 

 

A small set-up fee can be paid upfront or rolled into the loan and paid at the end. The only up-front cost is a small sum for independent legal advice on the loan itself.

 

This structure can work well in cases where it’s difficult to predict how long they will go on for.

 

They are flexible in that clients only pay for what they use and, as solicitors aren’t hindered by MPS proceedings, legal costs orders and discussions about payment, they are able to get on with the strategy of the case itself.

 

Hidden costs must be looked at beyond the headline interest rate. For example, a funder charging 2% upfront and 1% per month on what is drawn down (12% per annum headline rate) and a 1% redemption fee won’t be as good a value as a 1% upfront fee and 1.5% interest per annum on the drawn down funds (18% per annum headline rate) if a case settles and repays within one year, or when a client doesn’t draw down on the full amount available. 

 

Some providers will also provide a separate top-up loan for living expenses, which is helpful for clients who need to demonstrate a clear picture of their true financial needs.

 

This can also complement litigation by removing the need for expensive applications for interim maintenance while the finances are being ironed out.

 

If repaying a family member, using a living expenses loan from a litigation funder gives the borrower the reassurance that it will show up on the asset schedule as a hard debt and is therefore much more likely to be taken into account by a judge. 

 

With no-fault divorce set to be implemented in the near future, there are high hopes within the family law community that the focus will shift from a culture of blame towards an emphasis on fairness of financial outcome.

 

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George Williamson is managing director of Level, a family law specialist litigation funder

 

www.withlevel.com

 

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