The credit crunch divorce: do you get what you pay for?

The effects of the economic turbulence are laid out for all to see. This weekend I attended one of Yorkshire’s big charity balls. Last year there were no spare tables, and guests overflowed into additional halls. The ladies present were immaculately groomed and decked with twinkling jewels. Money streamed across the “casino” tables and glasses were filled with champagne. A spectacular raffle raised an extraordinary sum. This year that ball was a very different occasion, and it was sad to see. The raffle prizes raised little more than a few hundred pounds; the corporate tables taken by Yorkshire’s high flyers were few and far between.

To date, no client has told me that the current economic woes have been the direct cause of their divorce. What I can say, without a shadow of a doubt, is that the nature of divorce settlements is vastly changing. With households’ assets and incomes vastly reduced, a “clean break divorce” is now much less likely for many couples.

I think it is true that, just as unhappy wives married to wealthy men chose to divorce when times were good, unhappy husbands are now observing the downturn in their wealth – and deciding that if they are going to seek a divorce, now is as good a time as any.

However, I fear that with the credit crunch in full swing, a “cheap divorce” could end up costing these high-flyers dearly.

As the value of assets and expected future earnings spiral downwards, couples are increasingly opting for ‘maintenance-based’ divorces, which involve regular payments out of income calculated on the financial position at the time of divorce. However, at a later date when the value of assets has risen, this approach could lead to the recipient spouses rushing back to court to claim greater financial entitlements.

Any worried city bankers or property investors whose marriages have broken down and who are looking for an upside to the economic situation could find one in the divorce courts. Now is the time for a “clean break” divorce. On the face of it this may seem unrealistic because it could cost more this year than appears affordable. In the long run, however, this approach could save millions.

A “clean break” divorce involves an upfront cash payment to cover the capital and income needs of the recipient spouse (usually the wife). Her income needs are calculated using the Duxbury Tables. So if her income needs are substantial, her capital entitlement could run into seven figures for a lifetime maintenance award.

Devalued assets, which may be worth less than half of what they were worth one year ago, may mean that a “clean break” no longer appears possible. However, now is the time for negotiation: a recipient spouse looking to move on may still be inclined to take a lump sum rather than a reduced income.

Also note: the more your assets have depreciated -providing they have the potential to increase in value again – the more you may be able to save in the long run. This is particularly pertinent if you  want to avoid a capitalisation application a few years down the line, once the economy has stabilised again.

Of course, it follows that for the recipient spouse a “clean break” – unless it is a very attractive offer – should be avoided if at all possible. Because the couple’s wealth will be less than it was this time last year, it is imperative that the lure of a reduced one-off, lump sum is resisted. Otherwise, the recipient spouse surrenders the right to have their former partner’s wealth reassessed by the court at a higher level in the future and a substantial lump sum taken now, may not be as attractive a proposition in five years time when the economy has improved.

I predict that in general, divorce proceedings are set to become more turbulent. In “big money” cases over the past few years, lawyers have become accustomed to splitting assets equally, to meet both parties needs comfortably and leaving a surplus for equal division.  But from now on, the stakes for everyone involved are going to be higher. I suspect that the demand for hotshot negotiators is set to increase.”