Rise in loan-funded divorce litigation as clients struggle with costs

Manchester-based DWF is the latest firm to enter the growing loan-funded divorce litigation sector after signing an introducer agreement with the Co-operative Bank.

Under the deal DWF will ask clients unable to fund the costs of divorce whether they want to be referred to the Co-op. The introduction will follow a prima facie assessment of the share of the matrimonial assets the client is likely to secure, but the firm will not be involved in subsequent discussions between the bank and the client.

The arrangement is now in its fifth month and David Pickering, partner and head of family law at DWF, says a number of cases are already underway that are being funded with a loan from the Co-op.

According to Pickering couples are increasingly being put off divorcing because of the prohibitive costs involved and the firm's arrangement with the Co-op is just one way of accessing funds that will allow them to proceed with their decision to get divorced.

While solicitors will not usually bill clients until the settlement is finalised, other professionals expect payment for their services as they are provided which is one of the cashflow problems a bank loan can help address.

Loans to fund divorce proceedings have been available for some time but Pickering says many lenders have pulled out of the market or have made it harder to obtain a loan by increasingly requiring security.

At the root of the problem is the family courts' lack of jurisdiction to make interim capital orders, making it impossible for one party to access joint assets '“ often held in the husband's name '“ to fund the divorce proceedings.

Such schemes clearly have the potential of unlocking divorce litigation and keep revenue flowing into law firms' family departments, but Pickering rejects the suggestions that they encourage people to divorce.

'People come to solicitors' offices because they have reached a decision to divorce. Only if they decide to go ahead with this decision do we investigate funding options and such loans will help ensure they are in an equal bargaining position,' he said.

Hazel Wright, head of matrimonial at Cumberland Ellis, reports similarly that funding has been a significant problem for divorce clients. 'Getting a loan is an option many litigants are considering because of the disparity in available assets,' she said.

But Wright said the economic squeeze has put further pressure on lenders, with some turning down cases where the legal bill is estimated to be worth less than £100,000 and others requiring law firms to underwrite the loan '“ a solution which is a lot less attractive in the current climate.

James Copson, partner at Withers, agreed that loans for divorce litigation were becoming harder to obtain. 'Even if you can obtain them, the margins banks are seeking are becoming higher, and, where this is not the case, a lot are charging initial admin fees that put people off.'

'The alternative is to apply for a maintenance order including costs, but even that may not be sufficient to cover solicitors' and counsel costs.'

Copson added that lenders must be careful not to appear to be third-party funders against whom costs can be recovered.

Funders themselves say the momentum around loan-funded divorce litigation was gathering ground.

According to Jason Reeve, managing director at financial services firm Novitas Futures, funding is rarely an issue at the very top end but it is becoming increasingly problematic for middle classes.

'Married women '“ it is women in 90 per cent of cases '“ have few assets of their own and, although they can get a maintenance order, this will not normally be sufficient to fund divorce proceedings,' Reeve said.

'In the past solicitors were prepared to take on the financial risk but this is no longer the case,' he continued.

Unlike the Co-op, however, lenders will, in most cases, seek security either on half the matrimonial home '“ an option the husband is unlikely to agree to '“ or on other assets the wife may have such as a second property in her own name.

Others have traditionally agreed to less stringent terms on the expectation that this placed them in a prime position to later manage the funds obtained under the terms of the divorce settlement. But, in the current climate, this is no longer a sufficient incentive to lend unsecured.

Reeve agrees the withdrawal of traditional lenders and lawyers' reluctance to underwrite litigation, combined with the rise in divorces, is creating opportunities for alternative lenders but he also says the whole approach has to change. In particular, he says, lenders must be prepared to lend on a more flexible basis, with less strict loan to repayment ratio for instance.

Until now cohabitees have been unable to secure such loans, which Wright says can pose difficulties. But the continued economic downturn is making lenders reconsider the possibility. Reeve's own organisation is already looking at putting together a fund specifically aimed at litigation for cohabitees.