Finances on Divorce: A Guide
Resolving the financial issues between you when you divorce can often be the most difficult aspect of marriage breakdown. Working out how to divide your assets in a way that is fair, but also means that you both have your needs met, can sometimes be difficult to achieve. By getting married, you both acquire mutual rights to claim financial relief from the other and mutual obligations to meet those rights, and it is important that you understand what form those rights and obligations can take before you decide on how to deal with the financial arrangements between you and your former spouse.
Spouses and former spouses have rights to make financial claims against each other for any or all of the following:
• Maintenance (ie income payments).
• Adjustment of property ownership (eg transfer of a house from joint ownership to the sole ownership of one spouse).
• Lump sums (ie capital payments).
• Pension sharing.
These rights can only be brought to an end in two ways. The first and most usual way is by a Court Order. Usually an order is made by consent and achieving this should be your main goal. Using one method or another (full details of which are given below) negotiations will usually have resulted in an agreement under which settlement of the four types of financial claim have been agreed in a final agreement. The court is invited to make an order which sets out that agreement and dismiss any further claims which means that, as long as the Court thinks it is appropriate, neither of you can make any claims for anything else against the other in the future.
The second way is where a spouse obtains a divorce and then re-marries without formally asserting their rights against the other. In this situation, unless that person has already formally made their claims, either in the divorce Petition or by way of formal Court application before they re-marry, their rights to make their claims are automatically lost because of their re-marriage. This is known as the “re-marriage trap”. It is therefore important to sort out all financial matters before contemplating marrying again.
Should the parties decide not to obtain Court Orders dealing with financial provision and neither remarries, then the claims which each of them have against the other are simply left open. This situation is unsatisfactory in that it creates uncertainty because either spouse could make a claim against the other at any time, even years into the future. On the other hand, where one spouse’s financial position is likely to improve substantially it may be in the other’s interest to delay a final financial settlement.
Even where neither spouse wants to claim against the other, it is usually better for an application to be made by consent for the respective claims of each spouse to be dismissed.
What is taken into account?
Whatever route you chose for resolving your financial issues (see below), the factors set out in statute will be taken into account when considering what the financial solution should be, and the advice you receive will be geared around those factors. Consideration is given to all the circumstances of the case, first consideration being given to the welfare of any children of the family under the age of 18 and, in addition, regard will be had to the following matters:
(a) The income, earning capacity, property and other financial resources which each spouse has or is likely to have in the foreseeable future including, in the case of earning capacity, any increase in that capacity which it would be, in the opinion of the Court, reasonable to expect a person to take steps to acquire.
(b) The financial needs, obligations and responsibilities which each spouse has or is likely to have in the foreseeable future.
(c) The standard of living enjoyed by the family before the breakdown of the marriage.
(d) The ages of each spouse and the duration of the marriage.
(e) Any physical or mental disability of each spouse.
(f) The contributions which each spouse has made or is likely to make in the foreseeable future to the welfare of the family, including any contribution by looking after the home or caring for the family.
(g) The conduct of each spouse, if that conduct is such that it would in the opinion of the Court be inequitable to disregard.
(h) The value to each spouse of any benefit which one spouse because of the divorce will lose the chance of acquiring (most usually pension provision).
The aim of the statute from which these factors are taken is to achieve fairness. Often a key factor is the reasonable needs of the two parties to the marriage and any children.
In most cases, the Courts no longer have power to make orders for child maintenance except by agreement; an application to the Child Support Agency has to be made for child maintenance to be assessed.
Both you and your spouse have an absolute duty to each other and to the Court where appropriate to disclose fully your financial position so that a proper financial arrangement can be made. If you can reach agreement with your spouse without using the full court process, then the information you need to provide to the court is limited, but your duty to provide full information to your spouse is generally unaffected, whichever method for resolving your issues is used. If you or your spouse thinks that financial disclosure is not necessary, we can consider with you whether you should proceed without it or not. Financial disclosure is usually given by both parties completing a Financial Statement (known as a “Form E”) which is simultaneously exchanged with the other party. Essential supporting documents need to be disclosed with it, including the following:
• Property valuation which must be no more than six months old.
• Most recent Mortgage Statements.
• Bank account details and statements in respect of each account for the last twelve months.
• Details of all liabilities and requisite statements.
• Valuations of pensions which must no more than twelve months old.
• Surrender values of Life Insurance Policies.
• Two years’ accounts for any business/partnership/company.
• The last three payslips and the last P60.
It is therefore important that you keep all your financial documents, such as bank statements, credit card statements and pay-slips and that you do not destroy them, since you may be required to produce copies of these documents to your spouse, if not the Court. Whilst it is usually possible to obtain copies of these documents, institutions such as Banks can charge considerable amounts for copy statements of they are not available online. You would be well-advised to avoid such expense by keeping the originals of your financial documents from now on.
There are various ways of dealing with pension assets.
The first is known as ‘off-setting’. This is where the person without significant pensions receives an equivalent payment in capital from some other source. This is only possible where there is spare capital available after re-housing you and your spouse.
The second option open to the Court is a pension sharing Order. This means that an existing pension fund is divided, not necessarily 50–50, and passed over to the other person which, in practice, in most cases, will then have to be invested in a new pension. The division can be based on the value of the pension fund or funds, or on what income the pension/s are likely to produce.
The third option, not often used, is pension attachment, formerly known as ‘earmarking’. The Court has the power to order that a proportion of a pension, once retrieved both as to the annual income and the lump sum, should be paid to the other spouse. The Court has the power to order that a proportion of any death in service benefit should be paid to the other spouse as well.
The problem with pension attachment Orders is that they are complicated to draft and if the person receiving the attachment Order remarries then no continuing annual payment will be made. If someone changes job then that will mean that an Order regarding a death in service benefit will be of no effect.
This is a highly complicated area of the law and almost every case is different. It is not unusual to obtain a report from an actuary on the effect for both parties of the scenarios which are proposed in relation to pensions, so that the fairest outcome can be determined.
1. Council Tax
If you are now living on your own in your property, or have young children living with you, you should notify your Local Authority so that you can claim a 25% reduction in the amount of Council Tax you have to pay. Council Tax is based on the assumption that your property is occupied by two adults. Please note that you will not be entitled to the discount if you have a child or children over the age of 18 living with you.
You should also be aware that if you are on a low income and have little or no savings you may be entitled to Council Tax Benefit by way of help in paying your Council Tax. Further information can be obtained from the Local Authority to whom you pay Council Tax.
2. Joint Accounts
If you have a joint bank account with your spouse, you should ensure either that the account is closed or that the account is made a joint signatory account requiring two signatures for any money to be withdrawn. Otherwise any money in the account can be withdrawn, or an overdraft run up without your knowledge or permission and you will be jointly liable for any overdraft run up, even if you have not spent the money yourself.
In the same way, you should cancel any joint credit cards otherwise you will be similarly liable for any expenditure incurred by the joint holder of the credit card.
3. Ownership of Property
It is likely that you and your spouse own your property as ‘joint tenants’. This means that, if one of you dies, the survivor will be entitled to the whole property, even if divorce proceedings have been started or you are divorced, and irrespective of any provision in a Will or, if no Will has been made, irrespective of the intestacy rules.
It is possible to prevent this occurring by preparing a simple document known as a Notice of Severance which you can sign and then send to your spouse for signature. Once you have both signed this it will then be lodged at the Land Registry. After the Notice has been sent to your spouse, even if he/she does not sign and return it, the notice can still be lodged at the Land Registry and the property will then be owned by you both as ‘tenants in common’. This means that, in the event of you dying before your spouse, your share in the property will pass according to the terms of your Will or under the rules of intestacy if you have no valid Will.
The downside is that should your spouse die before you, you would not necessarily be entitled to the whole of the property, so it is a question of weighing up which option would suit you better.
Under the rules of intestacy, in the absence of a valid Will, until your divorce is made absolute, your spouse will receive the first £125,000 of all your assets (£200,000 if you have no children). Therefore, it would be advisable for you to prepare a Will, or if you have one already, to make a new one.
Please contact us for further information if you are interested in severing the joint tenancy or preparing a will.
METHODS OF ACHIEVING FINANCIAL SOLUTIONS
The Courts are very keen that divorcing couples should try other methods of resolving their issues before resorting to Court. This is because court proceedings can be expensive and can take a long time to reach a conclusion. Even if you do feel that court proceedings are the best approach for you, you will still be expected to try to negotiate a settlement with your spouse while the court process is running. This is often successful and very few cases go to final hearing, where a judge makes a decision on how your financial assets are to be divided. Most people prefer to come to a settlement by an agreement of one sort or another because it means that they have control over the situation and have not had a decision imposed on them.
The various options will be discussed with you and their suitability for your case assessed, so that you can make an informed decision. As stated above, whatever method is chosen, you will still need to provide full disclosure and all the factors taken into account as set out above on page 2 will still be given due consideration.
If you want to go to Court you first have to demonstrate to the court that you have considered other means of resolving your issues, and you will need to attend a MIAM – Mediation Information and Assessment Meeting – with a trained mediator. You may want to attend a MIAM anyway before making a financial decision, in order to explore your options and suitability further.
The main forms of dispute resolution are as follows:
You may wish to sit down together and try and sort things out between you. This may be cost effective and may seem attractive because it seems to be highly within your control. However, because of the importance of these issues, anxiety is likely to be high and it may be hard for you both to keep your discussions on track towards identifying best options and selecting the best of the outcomes. Neither of you will have the input of advice and experience from advisors and you will probably still need legal advice and help with turning what you agree into something more formal. It would be in your interests to seek advice anyway before agreeing to anything.
The process of mediation is where work is done face to face at the table. One mediator will sit with you both, assisting you to identifying the issues, identifying options to solve those issues and reality testing those options.
Legal advice is not integrated within the system, but it is advisable for you both to obtain independent legal advice and, as with a kitchen table solution, you will need legal assistance to turn what you agree into a formal court order.
This is where you each instruct a lawyer and issues are debated in correspondence and written offers and counter offers are made. You will both have the benefit of advice and experience as you go along. This can be effective where the issues between you are relatively straightforward or there is a large amount of consensus between you to begin with but if it becomes protracted it can become expensive and without a third party to “arbitrate” it can be difficult to find your way out of a deadlock if you are unable to reach agreement. You might find that you still need court proceedings or another method to resolve the situation. It can sometimes be helpful to have court proceedings running along side negotiations of this type.
Some people prefer to have a decision made for them by an independent third party, but find that using the court process is expensive and can take too long. You can choose which method of arbitration to use (from written submissions only to something like a full blown court hearing) and you can represent yourself if you wish. You can also choose the identity of the arbitrator – the only restriction is that they must be a member of the Institute of Family Law Arbitrators (“IFLA”). The arbitrator’s decision will be final and binding, except in some very exceptional circumstances. This can be a relatively quick and inexpensive way of resolving issues, but you must remember that you have to pay the arbitrator’s fees as well as those of any lawyers who advise or represent you. Like other methods, you may still need assistance with turning the arbitrator’s decision into a full court order.
This approach anticipates including within its processes therapeutic support for each of you if needed. The norms of Collaborative Practice include the following:
• You each have your own lawyer (but it must be one trained in this process).
• At the outset you will sign a Participation Agreement. It contains various ethical commitments.
• You are prevented from starting legal proceedings until you give notice. What this means is that you each are reassured that the other is not about to dash off to court. The increase in confidence often helps everyone to stay with the process working out solutions for longer. This means that some time is spent at the outset, assessing whether each of you are really “in the zone” for this process.
• The discussions happen in front of you and the solutions are yours – this increases the sense of control that you each have over what is unfolding. The lawyers’ role is to share with you their experience to help you understand what the court norms might be but also to structure the process so as to enable you to see the whole thing through.
• Collaborative practice tends to operate as the centre of a network, involving other professionals as required, which might be to secure financial advice or to make referrals to mediation or for appropriate counseling support.
If you decide that the support of the Court would be helpful in supporting your negotiations, or you have tried one of the other methods but it has been unsuccessful, or you have decided they are unsuitable for you, then below is an explanation of the court process, how it works and what is involved.
Proceedings relating to finances are called Financial Remedy Proceedings. They are part of, but separate from, the divorce proceedings, and run along side the divorce itself. Starting proceedings is not necessarily a hostile step as it can be helpful in having a timetable set down by the court to encourage both of you to exchange financial information in a timely way, so reducing unnecessary costs and delays.
The person who begins the financial proceedings is called the Applicant and the other spouse is called the Respondent. An application to begin financial proceedings is started by filing a Form A and the requisite fee at the Court.
The Court will then serve a copy of the Form A on the Respondent as well as any lender or pension provider.
At this time the Court fixes a date for a First Directions Appointment approximately three months ahead.
Before the First Appointment both parties are under a duty to the Court to make full and frank disclosure of their finances by completing the Form E referred to above. Form Es are simultaneously exchanged with the other party and a copy is also lodged at Court.
At least 14 days before the First Appointment the parties have to file the following:-
• A Statement of Issues.
• A Chronology of Events.
• A Questionnaire requesting any further information or documentation which has not been disclosed but should have been.
• A Form G, which confirms whether the First Appointment can be used as a Financial Dispute Resolution, i.e. leap-frogging to the next stage and type of hearing.
First Directions Appointment (FDA)
This is a Court hearing which both parties must attend. At this hearing the District Judge will direct the parties on how to proceed and will focus on the following matters:-
• Questions to be answered in the Questionnaires;
• Any additional documents that are required and/or production of other evidence;
• Property valuations;
• Business valuations;
• Pension actuarial reports.
Directions can often be agreed before going into Court but it is not unusual for neither party to be ready to settle. Unless settlement can be reached at this stage, the matter will proceed to a Financial Dispute Resolution.
Financial Dispute Resolution (FDR)
The Applicant must inform the Court of all offers and proposals for settlement seven days before the FDR. Both parties have a duty to make offers of settlement.
The purpose of the FDR is to encourage a settlement. Both parties must attend. The District Judge conducting the FDR will know what offers have been made and is likely to offer a view as to what he or she considers might be ordered at a final hearing. However the District Judge will not impose an order and will instead actively encourage the parties to reach an agreement of their own accord. The Judge’s overview can be very helpful where a deadlock has been reached and the parties have been unable to reach an agreement. The overview means that many cases settle at or shortly after the FDR.
Sometimes it can be possible to skip the FDA and proceed direct to FDR (the leap-frogging mentioned above), but this can usually only be achieved where there has been early exchange of disclosure, all questions have been answered and there is agreement on valuations and the approach to pensions. Otherwise the FDA is needed to resolve these issues and it can sometimes be essential to keep the case on track.
If no settlement is reached, the matter proceeds to a Final Hearing. This can be the most expensive part of the court process. After hearing oral evidence and arguments from both sides the District Judge will impose an Order upon the parties. In reality it is rare for matters to proceed to a final hearing as most parties realise it is best to reach agreement rather than have a decision imposed on them and also save unnecessary expenditure on legal costs.
Use of the court process does not mean that you can’t reach agreement with your spouse, even if the FDR has been unsuccessful. If an agreement is reached at any time before the determination of the final hearing, it is embodied in a Consent Order which is then placed before the District Judge for approval.
For further information on any of the matters raised here, please contact the Family Department at Stafford Young Jones.