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.'