The impact of the Financial Crisis on Divorce

For several months now, families have been feeling the pressure of the financial crisis. As inflation rises, the cost of living has rocketed, and the country is on the brink of another recession. One area that has not escaped the crisis is divorce, and especially financial remedy proceedings.

At the outset, it should be noted that other factors have played their part in impacting on the division of assets. The Divorce, Dissolution and Separation Act 2020 came in on 6th April 2022. What the government statistics show is that divorce numbers are up on the same time a year before.1 This is likely due in part to many couples waiting for the change in law before divorcing in order to remove the need for a fault-based reason.

Yet the statistics also show that rates of new financial remedy cases are down.2 There are several reasons why this may be. With hostility being removed from the divorce process, more couples are dividing their assets amicably, therefore reducing the number of contested cases. Also, as the reforms have made it easier for ‘DIY divorces’, fewer people are seeking legal advice,3 and they are not being made aware that getting divorced does not sever financial ties. The change in the law has also coincided with the financial crisis. This is key as to why divorcing couples may be hesitant to embark on financial remedy proceedings at this time.

Comparisons can be drawn to the 2008 recession to see what may happen in the near future. The financial situation 15 years ago saw average house prices drop by approximately 16%.4 Often, those impacted by the recession had a strain put on their relationships. At the time, many could not afford to divorce and cover the cost of two households. However, after the recession, divorce rates increased as people felt more confident of financial security beyond separation.5 This may become the case again now.

The UK is of course also still recovering from the financial impact of COVID-19. What lawyers started to see during the pandemic were clients who already had a binding financial settlement that were seeking to vary it. Yet the courts have determined that this will only constitute a Barder event (an unforeseen circumstance that significantly alters the value of assets and deems a final order unfair) in fairly extreme cases.6 Where there is a clean break order, it is likely that this should be honoured, or it would otherwise undermine their entire existence. However, where the order provides for ongoing maintenance, for example, the door remains open to variation. Similarly, for those who divorced but never addressed their finances, an unwitting divorcee may now find themselves facing financial remedy proceedings where their ex-spouse has fallen on hard times. The current economic crisis is not therefore the only factor creating a disturbance.

As was the case in 2008, a key issue affecting those going through financial remedy proceedings is the fluctuation in property prices. Practically speaking, this can make it difficult to value the former matrimonial home (FMH) and any additional properties, and obtain property particulars, that will still be accurate several months down the line. The same can be said for Form Es, pension CETVs, and business valuations. What this could mean is parties incurring additional costs to obtain updating disclosure, possibly at multiple points during proceedings. This should not be overstated however. These figures will still be useable, certainly for negotiation purposes.

One challenge professionals could face is that, given house prices have been falling, some clients may currently be hesitant to settle. They could be holding onto the view that the value of the FMH will soon rocket once the market gains stability. They may therefore take some persuading that this is by no means a certainty any time soon. Where house prices are lower and the parties have reasonable borrowing capacities, there could also be more scope for one party to buy their spouse out of the FMH, instead of them having to sell the property. Subsequently, there will be some who come out of the financial crisis with the exact outcome they desired.

Linked to the fluctuating market is the critical issue of mortgage rates. Due to rising inflation levels, these rates are increasing, making mortgages less affordable and leaving parties with a reduced borrowing capacity. In needs cases, this is particularly concerning where separating couples need to divide their assets to rehouse. With mortgage capacities going down and property prices not always coming down at the same rate, this creates a gap of unaffordability. Due to the volatility of the housing market, the reverse can also be true. Couples who are not achieving the desired sale price for their property are also falling into this gap, as increased mortgage costs mean less in the pot to rehouse. What this means in practice is that lawyers are going to have to work hard to stretch assets to meet needs.

Generally speaking, the courts are supporting a move away from spousal maintenance, especially on a joint lives basis,7 with a clean break encouraged wherever possible. This may be achieved by including a higher lump sum payment as part of the financial settlement instead of ongoing maintenance. Yet the increased cost of living currently means that the matrimonial pot cannot always stretch as far in needs cases. Whilst a financial clean break is often desirable, we may well see a greater need for maintenance, at least for a short while after proceedings conclude.

Drawing back to the issues of the property market, one problem that may arise is where one party is living in the FMH and there is an order for sale. The property may take a while to sell, or it may not achieve as much as hoped for. This could create a case for maintenance to help with mortgage payments until sale, or to cover the shortfall in sale proceeds. Equally, with mortgages being less affordable at the moment, there may be arguments for a lump sum payment to help with purchasing a new property. If such capital is not available as a single pay-out, again there could be greater argument for maintenance to assist in meeting the monthly mortgage repayments. This is, however, no doubt a short-term situation, and parties can be assured that they will be getting a fair financial order to last into the future.

Another key area to consider surrounding the financial crisis and divorce is pensions. As has long been the case, many people separating will be unaware of the importance of their spouse’s pension, and the value of a pension sharing order. With fewer people obtaining legal advice upon divorce, more will be missing out on their right to a valuable asset at a crucial time of financial hardship. It is therefore vital that professionals continue to promote the importance and value of independent legal advice.

Currently for some, due to the weaker stock market, there will be less in the pension pot to share. The same can be said for the valuations of investments, property, and businesses, all of which can be crucial assets to consider. For those not yet nearing retirement age, this may be less of a concern. But for people who are or will shortly be reliant on their pension income, this is an issue that legal practitioners will need to be alive to.

As an aside, the future may be slightly brighter for some divorcees for whom a pension share is a consideration given the recent changes introduced by the Spring Budget. With the removal of the Lifetime Allowance and extension of the Yearly Allowance, the value of pension pots, particularly for wealthier clients, has the potential to soar.8 It will therefore now be even more crucial that those divorcing receive legal advice on their rights. A noteworthy effect of the changes is that, in cases with a significant disparity in pensions where one party is over the Lifetime Allowance, the negotiation tool of having a pension share to prevent the transferor incurring a large tax bill upon drawdown is now gone.

Whilst there is financial uncertainty for those going through a separation or divorce, it is by no means guaranteed that the situation will change anytime soon. However, given that the recession has not materialised as severely as anticipated for example,9 matters may settle sooner than first expected. It is therefore important that couples are given the reassurance that pursuing their financial remedy cases now will still allow them to achieve a fair and reasonable outcome for the future.

[1] https://www.gov.uk/government/statistics/family-court-statistics-quarterly-april-to-june-2022/family-court-statistics-quarterly-april-to-june-2022#legal-representation

2 Ibid

3 https://www.gov.uk/government/statistics/family-court-statistics-quarterly-october-to-december-2022/family-court-statistics-quarterly-october-to-december-2022#legal-representation

4 http://news.bbc.co.uk/1/hi/business/7812108.stm

5https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/divorce/bulletins/divorcesinenglandandwales/2011-12-08

6 HW v WW [2021] EWFC B20

7 Waggott v Waggott [2018] EWCA Civ 727

8 https://www.gov.uk/government/publications/abolition-of-lifetime-allowance-and-increases-to-pension-tax-limits/pension-tax-limits

9 https://obr.uk/efo/economic-and-fiscal-outlook-march-2023/#chapter-1

By Lauren Garner-Jackson

This article was published in the June 2023 edition of The Barrister Magazine. https://barristermagazine.com/the-impact-of-the-financial-crisis-on-divorce/

Read more about Magdalen Chambers here.