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Divorce and the credit crunch

In an ideal world, the end of a marriage would lead to a clean financial break between a couple. The reality, however, is often far less straightforward writes Sandra Davis, head of the Family Department at Mishcon de Reya.

For high net worth individuals, finality can be achieved either by reallocating capital to meet the receiving spouse's need for accommodation and income or, in longer marriages, by dividing the family's wealth to reflect the couple's contributions to the marriage.

Despite the publicity divorce cases involving substantial assets receive, clean break cases are very much the exception. In most instances the financial constraint of having to maintain two households rather than one mitigates against the possibility of a couple severing all fiscal links. As a result, many former spouses remain financially tied to one another by the ongoing payment of spousal maintenance.

This means that the current turbulence in the financial markets is, in many cases, likely to re-open old wounds and increase the prospect of litigation between couples long since divorced.

In assessing the maintenance obligation of high earners, divorce courts in the UK have historically taken into account the payer's salary together with the average of any bonus payments he received during the three preceding years – even discretionary bonuses. As a result, maintenance liabilities between spouses in excess of £250,000 each year had recently become commonplace.

In periods of wage inflation, although a thorn in the side of a payer, maintenance payments, even at these stratospheric levels, have been manageable.

Times have changed, though, and rapidly. In the wake of the UK government's intervention in the banking sector, politicians have united in their calls for banks and their regulators to curb executive pay and City bonuses. This, combined with the effects of a global recession, will see former wives faced with the prospect of a significant reduction in their post-divorce standard of living and husbands far less inclined to pay for a clean break from a depreciating asset portfolio.

Much like investments, maintenance payments can go up or down. We are now entering a period during which the wives of high earners are either going to have to adjust their expectations, or have them adjusted by the courts.

Maintenance payments are assessed on the basis of the payer's ability to pay and the recipient's need for income to maintain a home and meet her general expenditure. Likewise, a clean break is assessed on the basis of capitalising those maintenance payments.

When remuneration packages and bonuses were on the up, wives benefited from the extra cash generated by their former husbands. Equally, they are going to have to share in the pain of much reduced incomes.

One paradox of the downturn in the economy is that in the short term the divorce courts are likely to be dealing with more applications to vary old maintenance orders than new applications for divorce.  

The triple whammy of inertia in the housing market, highly leveraged accommodation and the prospect of a significantly reduced income are all likely to combine to force couples to remain in unhappy marriages.

Meanwhile, former husbands who have paid their former wives maintenance, in some cases for many years, are likely to want to renegotiate their liability to reflect their reduced financial circumstances. One side of the equation, the payer's ability to pay, may have gone to pot. If he can't afford to pay at levels that were once affordable they will both have to tighten their belts.

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