Litigation funding enters the divorce arena as HNW spouses borrow to secure fair settlements
Litigation funding is increasingly being used to finance the costs of high net worth divorces, says Boodle Hatfield, the leading private wealth law firm.
This funding is used by the lower-income partner – usually the wife – to cover the costs of securing a high-value divorce settlement, as well as living expenses. It is particularly useful in cases where the higher-income partner is trying to drag out the divorce process, with the aim of causing the lower-income partner to run out of money for legal costs and accept a lower settlement.
Key facts on divorce litigation funding
- Litigation funding is often used in cases where one partner has been cut off from marital bank accounts and credit cards by their spouse, and is unable to pay legal fees for a high-quality divorce lawyer
- The size of loan ranges from [£50,000 to upwards of £3 million] for the highest-value divorces
- The costs of litigation funding can be high, with interest rates averaging around 2% per month. These rates reflect the risk taken by funders in making what is a very substantial unsecured loan to an individual, who may not have a large income
- The litigation funder is repaid from the settlement once the divorce is complete. This means they will only fund divorces where there are valuable assets at stake, and the divorcing spouse has a good chance of securing a significant share in the settlement
Emily Brand, Partner in the Family team at Boodle Hatfield, says: “Litigation funding is often the only way for the spouses of HNW and UHNW individuals to get a fair settlement in divorce. It takes away one of the biggest weapons their ex-partners can use – dragging out the divorce process in the hope that they will run out of money.”
“Many law firms and traditional lenders will simply not take the credit risk of getting paid from the settlement at the end of a divorce, while judges are not keen to order parties to pay for their opponent’s representation. That is guiding more people towards litigation funding, which is often the best solution for everyone.”
“One divorce-focused litigation funder was recently sold to a bank for £31m, showing that there is belief in the asset class from investors. Demand for funding from individuals, and supply of capital into the market have both increased. This may start to push interest rates down as funders compete to grow their books.”
“The monthly repayments on litigation funding can run to substantial five-figure sums, and divorcing spouses should take independent legal advice – not from their divorce lawyer – to make sure it is suitable. Borrowers have to give personal guarantees, and lenders will pursue them if they fail to make repayments.”
This article first appeared in the IFA Magazine and eprivateclient in July 2021.