What is the likely impact of the cost of living crisis on divorce settlements? - Wayne Lynn

It has often been a challenge, when advising clients, to factor in the “what ifs” when trying to predict the future impact of crucial financial decisions which they have to take when settling their financial settlements upon divorce.

In some respects, there is a need to try to get ahead of the curve.

So what do we make of the economic storm clouds that are gathering rather ominously?

It is often at times of separation and divorce that people inevitably have to confront their futures. Family lawyers often have to sit down with their clients to have a frank conversation as to where they see themselves in the next few months and – crucially - in the longer term, namely in the years ahead.

My view is that it is crucial for divorcing couples to plan for a future which may look significantly different to now. In particular, they need to consider a number of factors including having properties valued to establish their current worth, and to update valuations in the event that negotiations are protracted. Local house prices can be sensitive to fluctuation, and whilst the general trend has been upwards, that cannot be guaranteed.

Having regular updates of the value of investments. A widely reported case following the 2008 credit crunch saw a husband unsuccessfully apply to set aside an order which, as a result of the catastrophic fall in the value of his investments, had seen him left in a state of relative destitution. It is crucial to understand that the value of investments can fall, and that risk-laden assets should be treated with caution

Setting and agreeing (if possible) sensible and realistic monthly budgets. With annual inflation stubbornly hovering around 10 per cent, what may have been reasonable even six months ago may not be now, and of course bills and other expenditure is set to rise significantly in future. For those who depend on spousal maintenance, the needs of the recipient must also be balanced against the ability to fund the payments by the other spouse. If, the parties agree to “capitalise” future maintenance payments, with one party paying a lump sum to the other in lieu of ongoing payments, it is crucial to take advice to ensure that the payments are insulated (insofar as is possible) from inflation and other life events that are likely to occur in future, so as to ensure that the capital fund is not exhausted during the recipient’s lifetime, thus leaving them in a position of real need.

Debts being treated with rather more caution than in the past. In particular, the risk of default can lead to bankruptcy. Even if debts remain manageable, there may be a more cautious approach by lenders who are invited to grant loans or mortgages to fund divorce settlements or to enable the purchase of new homes.

In cases where there is a business, what the future of that business will look like. Many companies and well-run businesses have structured business plans, in order to project turnover and profit in future, as well as anticipating any bumps in the road. I would suggest that any business owner should look critically at the impact of inflation and the economic challenges which lie ahead, and consider its impact on performance, and, where appropriate, the value of the business itself.

Wayne Lynn is a partner at Silk Family Law.