Should I take a litigation loan to fund a divorce?
The legal costs in some matrimonial matters can be unaffordably high, particularly where there are significant assets at stake. However, with the prospect of a financial settlement at the end of proceedings, litigation loans can present a solution.
Family litigation funding process
It is not uncommon for parties going through divorce proceedings and financial dispute resolution to have an unbalanced access to resources to afford legal representation. Litigation funding has been acknowledged as a force that helps to ensure the ‘equality of arms’ in such proceedings and works on the basis that if someone cannot afford the necessary legal representation, a third party provides a loan to cover the legal costs. This loan is given under the expectation that the debt, plus interest, will subsequently be recovered from the settlement awarded.
The process of applying for litigation funding starts by an application submitted by your solicitors to the lending company. The lenders will then consider the amount requested, your likelihood of success, matrimonial and other assets involved and your ability to repay the loan, in deciding on whether you qualify for a loan. Interest rates are sometimes based on the risk involved with each case; i.e. higher interest rates can be applied to cases where the chances of success are lower.
Once a loan has been agreed in principle, applicants must seek independent legal advice on the terms of the loan before signing the contract. If following the independent legal advice, a litigant decides to go ahead with taking out a loan, then the funding will usually be released in three tranches aligning with:-
- The first appointment;
- Financial Dispute Resolution; and
- The final hearing
After the end of the proceedings, the litigant will repay the loan from their share of the settlement in accordance with the terms of the loan agreement.
Things to consider when applying for litigation funding
Whilst litigation loans can be an attractive solution in many cases, not all cases are suitable for such funding. Moreover, some products may be more attractive than others - particularly if proceedings drag on and the level of interest takes a large bite out of any settlement (or worse). Some litigation loans can carry annual interest rates of up to 30%. Where the product and/or case hasn't been suitable, litigants can in theory end up out of pocket.
Explore other funding options
Before deciding to take out a litigation loan, research alternative options. If there is no other option but to take out a loan to fund your litigation, you may wish to consider loans from high street banks and compare their offerings with a litigation loan. You may have family or friends who are able to assist. You could also discuss the possibility of a legal services payment order with your solicitor.
Compare the litigation loans offered
Find out as much as you can about a product and don't feel rushed to sign up to a loan. Research other lenders and compare their transparency, personal service, efficiency in processing and interest rates. Other things to learn about potential lenders include whether interest is charged on the total facility or just the amount you use, any ‘redemption’ fees, whether the loan is offered on a no win/no fee basis (i.e. if the settlement does not cover the loan, the full loan will not be payable) and any administration charges for arranging the loan. This will give you a better insight into the likely costs of the loan and amounts due after the divorce settlement.
Independent legal advice
It is very important to discuss the terms of your loan and fully understand the implications of the agreement. As payments are made in tranches, you need to ensure there will be sufficient funding in place to cover the entirety of the proceedings and you do not find yourself without funds in between hearings. Also be careful if the law firm offering you advice has a relationship with a lender. Your solicitors have a duty to act in your best interest, so be sure to discuss various options with them.
Valuation of underlying assets
It is important that accurate valuation of matrimonial and other relevant assets subject to litigation is obtained. This will allow you to assess whether you will be able to repay the loan (if successful in obtaining the said assets in full or in part) and afford the interest from the assets. This will also enable you to theoretically assess how much you will be able to benefit from the remainder of the settlement after the loan has been repaid.
In summary, it is very important to fully understand the costs involved in taking out a litigation loan to ensure that the arrangement makes commercial sense.
Articles are intended as an introduction to the topic and do not constitute legal advice.