A Discussion of Divorce Financing

As anyone who has gone through a contested divorce can tell you, the cost of seeing it through is far from insignificant. This is particularly true in cases involving custody disputes and those where the assets accumulated by the parties involve more than a bank and retirement account or two, a few cars, and a home. For purposes of this discussion I’m going to exclude contested custody litigation. There simply is no way a responsible family law professional can tell a client what it’s worth financially to fight for an individual’s goal when it comes to the role a parent enjoys in the lives of their children. I also doubt the topic I’m addressing here would even be available to a client looking for the financial assistance necessary to litigate a custody matter alone. With these initial points in mind, let’s focus on the application of what I’ll call “divorce financing” to family law matters where the dispute involves substantial and complex family assets.

The concept itself is far from new. ‘Husband X’ and ‘Wife Y’ have plenty of money and enjoy an upper-class lifestyle, but Husband X has control over it all (as a note, the gender I assign the respective parties in my hypothetical could easily be reversed as is often the case in real life examples). For any number of reasons Husband X is the only one on any of their accounts and throughout the marriage this never really mattered. When she wanted money, he’d stop by the bank and pick up the cash she wanted. When she bought something, he paid the credit card off at the end of the month. When ‘Reason Z’ results in both going to an attorney and the onset of contested divorce litigation, Husband X has ready access to the means necessary to fund the process while Wife Y is unsure how she’s even going to pay her attorney’s initial retainer, let alone finance months of litigation with depositions, expert fees, etc. The day after meeting with his attorney Husband X closes the credit card account Wife Y always used and sends her an email stating she should open a bank account and he’ll deposit $1,500 once a month.

Absent outside assistance, this scenario presents Wife Y with an apparently unfair playing field. She has the money… after all the funds Husband X draws from are as much hers’ as they are his. She just can’t access them, at least not until everything gets resolved. The prospects of him voluntarily transferring the funds she needs for what he’ll view as paying for her to put up a fight fall somewhere between slim and none. Let’s just pretend for the sake of this discussion Husband X and his attorney are not oblivious to the fact that this disparity in access to money gives them an immediate and significant advantage. If the Battle of the Bankbook controls, this looks like it’s over before it started.

Sure, there’s always the opportunity to request advanced legal fees from a Court, but this assumes Wife Y can retain an attorney to file what’s necessary to make that request and then go to Court to argue it. And as someone who has personally handled both sides of these arguments on more than a few occasions, I’d suggest that generally even when a Court finds an advanced fee award merited, very rarely does the amount awarded meet the need (for now let’s also ignore that Wife Y just used a portion of what the Court gave her, to get it… she literally paid to get access to money that at least under this hypothetical, is equally hers’).

So what is Wife Y to do??? Just sign whatever settlement agreement Husband X’s attorney prepares? After all, regardless of how tilted the agreement is in Husband X’s favor, Wife Y can’t possibly afford to pay what it would take to get an attorney who could either negotiate a fair agreement or convince a Court to give her what she deserves. I’m certain there are many who felt this way when faced with a similar situation. Let’s not forget this pressure is received during one of the most emotionally challenging experiences a person can go through: a divorce. And sadly, I also know it’s not uncommon for a spouse to succumb to the pressure of such a scenario, signing away on an agreement that provides them with a division of assets that fails to approach what they were entitled to, had they the ability to fight for it. But this discussion is about those who don’t or at least don’t want to… they recognize the absurdity of the offer and they’re not signing.

In many instances the answer is help from family or friends, being loans or gifts from parents, siblings, etc. Others open and place large sums on credit cards under the assumption they’ll pay off the balances when the case is resolved. And still others find an attorney, any attorney, who will take as a retainer whatever the client can pull together from the resources available to them. I’m not here to criticize any of these options as all of them obviously represent a better decision than the alternative… agreeing to what they should not. But apparently there’s another option out there, one that’s at least new to me: ‘divorce financing’.

I first learned of this in the December 5, 2010 New York Times article by Binyamin Appelbaum titled: “Taking Sides In a Divorce, Chasing Profit”. I saw it come up again when CNBC aired Divorce Wars earlier this year and included a segment on the topic. As yet another example of capitalism in action, an industry emerged to serve the niche identified in my example: ample funds but no access to it in the short term. There are firms that loan money to parties in a divorce case to finance the process itself. The gist of it using my example is that rather just sign away at the agreement Husband X’s attorney presented her, borrow money from family or friends, or rack up enormous credit card debt, Wife Y goes to ‘Firm A’ to finance her divorce case. Admittedly I do not know the terms, restrictions, rates or amounts available from these divorce financing firms. But Wife Y promises to pay Firm A back at the conclusion of the divorce case using the property and/or spousal support she receives as a result to do so. And in exchange Firm A covers Wife Y’s legal fees and costs, expert fees, etc. presumably until the case settles by agreement or the judge issues her ruling.

Now there are a few key points to clarify here. Firm A and divorce financing firms like it are separate and distinct entities from the law firms that actually do the divorce work. The attorney Wife Y retains using the money she gets from Firm A, does not work for Firm A. Firm A is a part of the financing industry, not the legal profession. This distinction is an important one from the legal professional’s point of view because family lawyers cannot take a case on a contingency fee basis (where the lawyer is paid at the conclusion of the case from what their client receives as a result), at least not in the jurisdictions where I am licensed or any other I am aware of.

The reasoning behind this rule enforceable on family law attorneys (at least those who want to maintain their law license) is that contingency fees in a divorce case allow for the potential of inappropriate pressure placed on the client by their own attorney. The theory being that such an arrangement gives the attorney a financial interest in the outcome of the case. If ‘Attorney B’ were to take Wife Y’s case on a contingency fee basis, Attorney B knows she’s not being paid until the case settles or a court resolves it. If settlement efforts are going nowhere, the trial is still months away, and Attorney B is $50,000 in the hole on fees accumulated and advances to experts, Attorney B might let these factors impact the advice she gives Wife Y on whether or not she should accept Husband X’s latest offer. This is a situation to be avoided and the reason for the rule. I believe it’s also one of the reasons that paved the way for the industry of divorce financing.

Another point to clarify here is that the option of divorce financing is simply not available to many or most people going through a divorce. Presumably this is a byproduct of the business model itself. Unless there is enough money and assets in a marriage to give Firm A security to know they’ll be reimbursed at the case’s conclusion, it’s very unlikely they’d agree to finance the potential client’s litigation. This also goes to why I excluded contested custody cases from this discussion. While many (including me in certain instances) would argue that financial resources applied to obtaining a goal related to custody is money better spent than that applied to disputes over property division and support, there’s no security represented to the divorce financer.

Here are some specific questions I’d want clarified for my client by Firm A before he or she proceeds with divorce financing, all of which apply to the contract between Firm A and Wife Y. This isn’t every question appropriate, just the ones that jump to mind.

• Does the contract secure financing until the divorce case is over (settlement reached or court order entered)? I would hope the answer is yes. Otherwise the arrangement might only compound Wife Y’s problems. She could have her case financed up to a point, building up a big debt to Firm A in the process, and then have Firm A refuse to continue financing the case even though no resolution has been achieved. I’d presume for business reasons alone Firm A would be in it until then end. After all, they’re source of reimbursement isn’t accessible by Wife Y until it’s over. But I don’t know and I’d want to. Also, what about appeals?
• As with any financing contract, what is the interest rate? Basically this comes down to whether this option ultimately costs Wife Y more than it would to use credit cards and personal loans to cover the divorce.
• Does the contract give Firm A any input into accepting or rejecting settlement proposals Wife Y receives? I can’t imagine it does. After all, this would give Firm A the exact power over Wife Y the rule against contingency fees (wisely) keeps from the divorce attorney. But at least as far as I’m aware, Firm A is not subject to the rules on lawyers. Hopefully an unreasonable and inapplicable concern on my part, but I’d make darn sure first.
• What are the possible penalties involved with timeliness of paying back Firm A? Thanks to Firm A’s financing Wife Y can afford Attorney B and she gets Wife Y a great settlement. Husband X signs a contract obliging him, among other things, to pay Wife Y a nontaxable monetary award of $1 million “forthwith”. Wife Y was going to use this money to pay Firm A the $100,000 she owes them, allowing her to keep the retirement accounts and alimony she receives to buy and support her new life in a new house. Except Husband X isn’t exactly thrilled with the settlement Wife Y leveraged so rather than giving her the million right away he holds off on sending her the check for a few months, saying “forthwith” means something different when you’re talking about a million freaking dollars. Well what if Firm A’s contract with Wife Y says payment of the loan is due within thirty days of the signing of a comprehensive settlement agreement or else she’s charged an additional 1% interest for every week beyond the thirty days the loan remains unpaid? The point here is Wife Y being aware of the potential penalties when she signs the contract with Firm A, and relaying them to Attorney B so she keeps them in mind when drafting the settlement agreement, could avoid this problem altogether. Wife Y may also be able to convince Firm A to agree that payment of the loan will be made within thirty days of her receiving the funds paid to her at the conclusion of the case.
• Do the terms of Wife Y’s contract with Firm A preclude a court from making Husband X responsible for her legal fees? Frankly I’d be surprised if this exact issue isn’t addressed in numerous courts (and maybe even appellate courts) over the next few years, if/as/when divorce financing becomes more widespread. On this one my thought is that no contract term or provision between Wife Y and Firm A could restrict a court’s jurisdiction to award what it feels merited by the evidence in a divorce case. But if a provision of the contract states something like: “Wife Y acknowledges and agrees that she alone shall be responsible for timely satisfaction of all funds loaned to her by Firm A pursuant to this contract,” wouldn’t this give Husband X a valid argument he can’t be made responsible for it?

So, there you have it… you probably just read more than you ever thought you would about a topic you’ll hopefully never find applicable to your own life. Now you’re probably thinking “typical lawyer, all he did was talk about a topic without ever actually committing to a position on it.” And in some ways you’re right because really that’s not my goal here. I’m here to discuss a topic relatively new to me. And it being relatively new to me means I don’t know enough about it yet to tell you one way or the other whether I think it’s a good option as a general matter. But in the spirit of giving you a little more commitment than you might be accustomed to receiving from lawyers I’ll go further, though I won’t promise you it’s much more.

First, I’ll say the same thing generally about divorce financing that I did about borrowing from friends, family, credit cards or even hiring an attorney who’s a bit out of his or her league in the context of my hypothetical… it’s better than the alternative of signing away on an agreement that you know is unfair before you even get an attorney’s opinion on it. Think I’m talking about a situation that never comes up in the real world? You’re dead wrong. I can’t even tell you how many clients I’ve met with who came in asking me to help them get out of an agreement they knew was unfair when they signed, either because they didn’t think they could afford to fight it or they just wanted to be done with it regardless of what they walked away from in the process (until time passed and they realized just how much they signed away). And my guess is this divorce financing alternative is only going to become a bigger, more widespread option, which hopefully means there will be fewer people out there who sign something they shouldn’t because they don’t see any way around it.

Ok, so even that was sort of noncommittal on my part since all I really said was it’s better than signing a raw deal and I concede that may not be brilliant legal insight on my part (not to suggest what I’m about to tell you is). Personally I think the real focus of anyone considering divorce financing should be on the cost/benefit analysis of the dispute itself. If the reason or issue Wife Y thinks she needs divorce financing to push back against Husband X isn’t worth the cost of the divorce financing, she shouldn’t do it. Sounds basic and obvious right? Well, very little is in a divorce, at least when you’re the one going through it. Remember what I said about 20 paragraphs ago… this is one of the most emotionally challenging times a person can go through. Objective analysis does not exactly flow from the brain when emotions are clouding the mind.

Which leads us to my firm and absolutely committed take on the subject: divorce financing is best suited for situations where Wife Y develops a relatively clear picture of the financial stakes in dispute AND it’s purely a financial stake (so the desire not to cave, vindication, spite, etc. are not good reasons). Anything more than a dollars and cents issue (again, excluding custody) is not going to be cured/resolved/addressed by the financial backing of a divorce financing firm willing to loan the money. But how does she do that if you’re telling me she can’t possibly be expected to do an objective analysis with all the emotional strain she’s under and she hasn’t obtained the divorce financing to retain a good lawyer? A remarkably insightful question. Answer: she buys an hour or two of a good attorney’s time. Sure, no guaranteed answer and certainly no resolution with Husband X will be reached in that time. But that’s not the point. If Wife Y comes into the meeting with what Husband X proposed and some facts she pulled together herself that support her belief that his offer isn’t a fair one, Attorney B should be able to provide some insight into the range of potential outcomes on the issue at hand. With that, Wife Y will have a much better understanding of whether divorce financing is a smart solution to her problem.