Partner Jo Carr-West’s article was published in EPrivateClient, 17 January 2023, and can be found here.
The cost of living crisis and divorce
The UK is back in recession and late last year inflation figures hit a 40-year high. Whilst the financial situation will raise challenges for many, particular difficulties can arise for divorcing couples.
Do recessions increase marital breakdown?
Traditional wisdom holds that divorce rates decrease in times of economic strife as couples cannot afford to separate – to stretch their resources to cover the costs of two households. However it is also acknowledged that financial pressure can put strain on relationships, and a 2014 study by Relate found that those most impacted by the recession were more likely to have experienced relationship breakdown.
How could the recession impact negotiating a financial settlement on divorce?
The starting point in settlement negotiations should generally be a schedule setting out the parties’ assets, liabilities, income sources and outgoings.
Couples separating during a time of financial upheaval will need to make sure they have recently updated asset valuations, and, if negotiations take place over many months, ensure they keep figures updated. In addition, if evidence of mortgage capacity is relevant, parties should keep this under review and check that the advice that they have received remains current.
Whilst it will be easy to update the value of assets such as investment portfolios, updating the value of properties and businesses may involve paying additional fees to experts to update their reports. Parties will also need to remember that there is likely to be knock on effects on any consequent tax liabilities.
Pension values are also in a state of flux, and whilst pension providers must provide free annual valuations, they can charge for additional valuations.
Typically, a schedule of outgoings is compiled using information from the previous year’s bank and credit card statements, adjusted for single life, a new home, etc. With inflation so high, it will be necessary to check current costs and ensure the projected budget is accurate in the new reality and, if necessary, consideration should be given to updating the budget to ensure accuracy.
Delays in the family court are, unfortunately, worse than ever. Whilst may couples now choose to avoid the court system if possible (for example by using arbitration, mediation or solicitors’ negotiations), those in court are likely to need to obtain directions providing for the updating of budgets and valuations in advance of hearings.
How might the recession impact the outcome of settlement negotiations?
One of the factors to be considered when determining the terms of a divorce settlement is the couple’s standard of living during the marriage. It is particularly relevant after a long marriage, when it may be appropriate for both parties to be able to maintain the marital standard of living. In times of recession and high interest rates, it simply may not be possible to stretch the available resources to maintain two households at that level, and compromises may need to be made on both sides. Where there are minor children, their welfare must be the first consideration, and so which parent they spend most of their time with could be a significant factor.
What particular factors may need to be considered when drafting settlement terms?
Settlement arrangements will need to take into account the financial reality and market conditions. For example, if a property is to be sold, thought should be given to what happens if it takes a long time to sell, or ends up selling for significantly less than expected – who will live in the property pending its sale and who will pay its costs whilst it is in the market? Should there be an adjustment to the percentage division of the sale proceeds if they fall below a particular threshold?
The recession may generate liquidity issues, and whilst it’s generally considered desirable to achieve a financial “clean break” without ongoing financial ties, in such cases longer-term arrangements, such as instalment payments, may be needed.
Finally, whilst it is generally appropriate to provide for ongoing maintenance payments to be adjusted annually in line with inflation, this may now be particularly significant. If acting for the paying party, it may be appropriate to consider whether the level of adjustment for CPI can be capped but query whether this would be a fair outcome if inflation rates continue to soar.
What if asset values or income change significantly shortly after an agreement is reached?
Cases which took place following the 2008 economic crisis and the COVID-19-related market disruption confirmed that market fluctuations will not justify overturning a divorce settlement approved by the court. When signing up to an agreement, it’s important to understand that it will be binding, even if the parties’ financial situations develop differently to what was anticipated.
The exception is in relation to maintenance; ongoing periodical payments can always be varied if there has been a change in circumstances, such as a significant fall in income, or conversely a significant increase in costs. Whether a change will be ordered depends on all the circumstances.
How can divorcing couples save money on legal fees?
This will be a priority for many during a recession. Avoiding court can keep costs down, as well as being quicker and less acrimonious. Instead, parties can use services such as mediation, arbitration and solicitors’ negotiation, or new services where one lawyer advises both sides.