Financial Settlement – Divorce
Table of Contents
What is a financial settlement?
A financial settlement is an agreement between parties to resolve any financial issues and fairly separate their finances in the event of a divorce, dissolution or separation.
There are various financial aspects which need consideration when a marriage or civil partnership breaks down. The division of assets between couples is a significant part of the divorce procedure and can become a lengthy and complicated process. Often negotiations of this nature can lead to acrimonious disputes if not handled with care and professionalism.
If couples come to an agreement on how to divide their financial assets, it is advisable to apply for a ‘consent order’ to make the arrangement legally binding. A consent order is a legal document confirming the agreement between both parties and requires the approval of a judge. The agreement will ensure that neither party is able to make further financial claims against each other.
It can include details about how you decide to arrange your finances such as:
- how any properties will be owned
- maintenance payments and living expenses
- share of your partner’s pension payments
Both parties will be required to sign the draft consent order. You will also need to get the consent order approved by the Court.
After the court gets your paperwork
A judge will approve your consent order to make it legally binding if they think you have made decisions that are the best interests of both parties.
If the judge does not think your consent order is fair, then they may order the following:
- Amend the consent order
- Make a new court order to tell you how to divide your assets
Applying to court for a financial remedy
Where couples cannot reach an agreement on how to divide the assets in the event of a divorce, then mediation is the next step unless there is a justifiable reason as to why mediation is not appropriate. If mediation is not successful, then an application to the court for ‘financial remedy’ is necessary.
Financial assets which may form part of a settlement can include:
- The Matrimonial home
- Your properties
- Other assets
Once either party commences the proceedings, a court hearing will be set to determine issues relating to divorce finances. Usually there are only three hearings in financial remedy proceedings, however, there can be several more.
How does the court decide the financial settlement?
In English law, the starting point for division of assets is usually an equal split, however, the courts will consider all relevant factors to ensure fairness which may not lead to a 50-50 split. The judge shall decide on the division of assets based on several factors including:
- the age of each party to the marriage and the duration of the marriage
- The income, earning capacity, property and other financial resources which each of the parties to the marriage 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 in the opinion of the court be reasonable to expect a party to the marriage to take steps to acquire
- the financial needs, obligations and responsibilities which each of the parties to the marriage has or is likely to have in the foreseeable future
- Standard of living enjoyed by the family prior to the breakdown of the marriage
- The role in the marriage, for example if you were the ‘breadwinner’ of the relationship and. The court will consider the contributions which each of the parties has made or is likely in the foreseeable future to make to the welfare of the family, including any contributions by looking after the home or caring for the family
- Any physical or mental disability of either party of the marriage
The judge will usually try and make a ‘clean break’, so that everything is divided and as a result there shall be no financial ties to one another upon conclusion.
Courts have a wide discretion to determine the division of assets based on the facts of each case and will attempt to balance each spouse’s claim with reference to the above factors.
Spouses and former spouses have rights to make financial claims against each other by applying to the Court for orders for any or all of the following:-
- Maintenance (i.e. income payments).
- Adjustment of property ownership (e.g. transfer of a house from joint ownership to the sole ownership of one spouse).
- Lump sums (i.e. capital payments).
- Pension sharing-attachment.
These rights can only be brought to an end in two ways. The first and most common way is by a court order. Where one or both spouses do not wish to proceed with financial claims then, provided the court agrees that such an order would be appropriate, an order can be made dismissing their financial claims.
The second way is where someone obtains a divorce and then re-marries. In this situation, such a person is normally caught in ‘the re-marriage trap’. The effect of this trap is that they have lost the right to make those financial claims against their former spouse.
Should the spouses decide not to obtain court orders dealing with financial provision and in the event that the remarriage trap does not apply, then the claims which each of them have against the other are simply left open. This situation is often unsatisfactory in that it creates a great degree of uncertainty because it leaves the possibility of one spouse making a claim against the other at any time. 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.
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. The aim of the Court is to achieve fairness.
Following a landmark decision called White v White in 2000, the Court has to consider an equal division of assets built up during the marriage, unless the marriage was of short duration, or the assets are insufficient to satisfy capital needs in particular re-housing. However, often a key and decisive factor is the reasonable needs (especially housing needs) of yourself and your spouse, which often overrides any possibility of an equal division of assets.
In financial proceedings, both you and your spouse have a duty to each other and to the Court to fully disclose your financial position so that a fair and suitable financial arrangement can be made. That is an ongoing duty which continues until an order is approved or made by the Court.
The Court has numerous powers regarding pensions:-
- The first is known as ‘off-setting’. This means that the Court looks at the transfer value of the pensions and decides that the person without significant pensions should receive an equivalent payment in capital from some other source. This is only possible where there is 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 spouse which in practice, in most cases, will then have to be invested in a new pension.
- 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 received 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.
This is a highly complicated area of the law and almost every case is different.
Disposal of Assets
If your spouse has disposed of assets with the aim of frustrating your claims for a financial settlement or you believe that he/she is about to do so, then the Court has wide powers to deal with such situations.
Under section 37 of the Matrimonial Causes Act 1973, the Court can prevent someone from carrying out a transaction or from transferring assets out of the country or to someone else. In addition, the Court can set aside certain transactions which have already been carried out where they were completed with the intention of defeating a claim for financial settlement arising from a marriage.
The Court can exercise these powers whilst a financial application is proceeding or, indeed, in some cases after a financial provision order has been made.
However, the Court cannot order a transaction to be set aside if someone bought the asset from your spouse in good faith without knowing that the motive behind the sale was to reduce your spouse’s assets to frustrate your claim.
If you make an application to set aside a transaction made by your spouse then, if the transaction took place less than three years before your application, the Court can presume that the transaction was completed to frustrate your financial claim unless there is convincing evidence to the contrary.
A Maintenance Order can be made wherein the court can order that your wife makes regular payments to help with the living costs of both yourself and your children. This is set for a limited time period or until either of you dies, marries or enters into a new civil partnership. Changes to payment can be made depending on the individual’s income too, for instance if you lose your job or get a better paid job.
One of the most important decisions when writing a will is deciding who to appoint as an executor. Therefore, it is important to choose someone