Third Party Funding for Divorces
March 18th, 2011
Companies, such as Balance Point Divorce Funding, have entered the field of divorce by providing funding for attorney’s fees, forensic accountants, asset investigators, fraud investigators and a reasonable living allowance, all necessary in connection with a divorce. Third party funding companies help balance the financial resources of the parties in divorce for example when the couple has just one breadwinner or when there is a substantial income difference between spouses. While Balance Point Divorce Funding is not a direct lender, direct lending is an option with other companies focusing on funding divorces. The direct lenders are simply loaning money which must be re-paid. A third party funding company, such as Balance Point Divorce Funding, actually invests in your case by receiving a percentage of your final divorce claims resolution.
From the perspective of the divorce lawyer, this is a great idea. Third party funding provides the lawyer and the other professionals with funds to vigorously represent a party in a contentious divorce. The real question is, is this a good financial decision for the client? To answer this question, I posed several questions to financial advisor and wealth manager, Laura Gilman, President of LGA Financial in Los Angeles, CA.
Can you imagine a situation in which divorce funding might be a good choice for a client?
It is definitely not for everyone. I believe Divorce funding is best utilized by wealthier clients, where there is a dispute over a sizable estate and where the wealthier spouse may be hiding assets or using delay tactics to force the less-wealthy spouse into an unsatisfactory or unequal settlement. For example if the wealthier spouse owns a private business where there is a significant dispute over the value of that business. Or if there are hidden assets, non-marketable or illiquid assets that need to be properly valued or offshore assets that need to be tracked down – these all require hiring experts, which can be costly but could lead to much larger settlements if done effectively. I don’t believe funding would be appropriate for cases that do not involve significant assets disputes, such as custody cases or non-financial issues.
What variables might make it a better or worse choice?
What makes this choice to utilize funding for a divorce better or worse is really a case by case analysis. I would recommend the client perform a risk analysis to determine the cost/benefit relationship and whether it is really worth the expense for the reward you are receiving, just as you would evaluate any other investment venture. It can be undesirable, for example, to fund a divorce with credit cards as many times the client will end up saddled with debt they cannot repay. That is unless the client pre-determines the amount they are comfortable spending before they engage in the proceeding. Some divorce funding firms structure their fees so that they take a percentage of the settlement so they only get paid if the client wins their case. As such, the client should calculate a risk reward analysis to determine if the probability of reward is worth the cost of the funding. However, some firms charge interest where repayment is only required upon settlement of your case. The concern there is what happens if your do not achieve your desired settlement. Now the client is potentially in a worse financial situation.
What else to you think people should know?
I would also recommend the client perform a budget and cash flow analysis of their current spending needs to ensure they truly understand what their cash needs are and determine if the settlement after the costs of the loan is reasonable for the client to live on.
Ms. Gilman has provided sage advice about the possible long-range financial impact of using third party funding for your divorce. Before making any decisions in your own matter, you should consult with your accountant and/or financial planner to determine whether any type of divorce funding is appropriate.