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29 September 2023

Divorce in a recession

Rebecca Cockcroft, Head of the Payne Hicks Beach Family department, discusses the impact of the economy on divorce.

2023 has been a pretty dismal year for the UK economy and there sadly seems to be little sign of the financial pain abating as we head into the final quarter. The cost of living crisis has had a devastating impact on many families and whilst inflation peaked at 11.1% in October 2022 (a 41 year record), it still remains stubbornly high (6.8% in July 2023) with many cost rises now firmly baked in. It has been reported that company layoffs and redundancies are escalating, bonus season in The City is expected to be a sanguine affair and rising interest rates are impacting on businesses and economic growth as well as homeowners.

Financial worries can unsurprisingly place relationships under strain. In some cases, the pressure may lead to marital anxiety and ultimately the disintegration of a marriage. For others, an already fragile or failing relationship comes under the spotlight and crumbles. Separating in uncertain economic times can be far from ideal and will add a further layer of complexity to an already emotionally fraught situation.

So, is it better to divorce now? Or wait for the economic position to improve?

The law, like life, does not provide a one-size fits all answer. Each case is unique and outcome depends on individual circumstances. Before letting the genie out of the bottle, there are frank conversations to be had with your divorce lawyer. A spouse contemplating divorce needs to be honest about their priorities and wish list, however mercenary they may sound. It is imperative to ask the right question so you get the right advice. A divorce means that you need to run two households on the same level of income. Retaining the family home may also be unaffordable if there is not enough capital to buy another comparable home. Freedom comes at a price.

Some spouses may prefer to tolerate a less than ideal partner until the perfect storm of rising prices, rising interest rates, fragile housing market and redundancies passes. Parting with a dream home or taking children out of a cherished school may be too draconian in the short term and a spouse may decide they have no option but to remain married, put the children first and wait for the economic situation to improve.

This dynamic certainly played out in 2008 at the start of the banking crisis (with the inevitable bounce-back once Quantitative Easing was in full swing). A similar pattern is likely to re-emerge in 2023/24.

Bonuses can be a binary issue when divorcing in a recession – it depends which side of the fence you are sitting on. If financial services are struggling, a high earning, or especially calculating spouse, may decide to file a divorce application because their earnings are depressed. This could result in them securing a lower spousal maintenance award and, in an ideal world, put the much coveted ‘clean break’ on the agenda i.e. you pay no maintenance to your spouse at all.

Conversely, it may be better for a spouse to hang in there and keep a low profile until bonuses are back in vogue. That way, they can secure a more generous maintenance award or a longer term of maintenance.

If a spouse has retired/been made redundant and big bonus days are a unquestionably a thing of the past, it is not unknown for a spouse to request a divorce so they can collect their full share of the marital spoils before they are depleted, together with part of any severance package which was awarded.

During the 2008 recession, the value of many assets and businesses was depressed by market conditions. Financial settlements were resolved based on these low valuations which enabled one spouse to buy out the other spouse at much lower figures than would have applied in a more buoyant market. Following the economic recovery, many of those businesses quickly recovered in value meaning the deals reached were highly advantageous for the business owner.

However, the flip side of these cases was that many a divorce lawyer also saw spouses who backed themselves and their business, only for it to plummet in value or go into liquidation. In such circumstances, one spouse ended up with all the liquid, copper bottomed assets and the other spouse after years of hard work was literally left with nothing, unable to appeal or set aside the court order.

By way of example, prior to the recent tech crash, an entrepreneur may have bought the other party out of shares in a tech business when those shares had an inflated value. When the share price plummeted the individual who retained the shares (rather than sharing risk and assets in specie) felt very hard done by at best, or faced bankruptcy at worst. Meta and Tesla stock fell by circa 70% in 2022 and interestingly, the dating App – Match – also fell 70% in 12 months, perhaps supporting the view that in times of financial trouble, the last thing people are looking for is a new long-term partner!

While the value of investments and pensions might currently be depressed, there can be ways to resolve these issues now without waiting. Pensions are usually divided in percentage terms, which leaves each party with the equal risk/ benefit of the pension decreasing or increasing in value in future and Investment Portfolios can be divided in specie. Spouses can if necessary agree to a deferred sale of a family home so that they both share in the upside of a current low fixed mortgage/future price increase. They can also agree to share any potential tax consequences if one spouse moves out long before the sale.

Parents of small children sometimes wish that the primary carer and the children remain in the family home for as long as possible in order to provide the children with stability at an unsettling time. With increased interest rates, rising utility costs and a higher cost of living this may no longer be affordable. Some parents have even resorted to longer term nesting arrangements, where the children remain in the property and the parents go back and forth, which can be very unsettling for children and parents alike. The alternative however is no less palatable. If the parties are unable to retain the matrimonial home and are looking to each rehouse utilising their respective mortgage capacities, they face interest rates on those borrowings at around 6%. For many, this dramatically impacts the level they are able to rehouse at and can encourage spouses to ride out the economic rollercoaster when they consider the options.

The current turbulence undoubtedly makes securing a settlement more complicated and nobody can crystal ball gaze with certainty and say what assets will be worth once the green shoots of economic recovery start to appear. Valuations can sometimes move so quickly or be so volatile that they may need to be updated more regularly and at a cost. This may also lead couples to conclude that it is better to wait for increased stability before their financial separation.

Finally, it must be remembered that financial settlements on divorce are bespoke based upon the particular circumstances that exist at the time and the quantum of assets. There is no certainty as to how long the current financial situation will persist and this makes the decision on when to divorce particularly difficult. Timing may be important and early advice from a solicitor can help determine the relevant factors that may influence whether to divorce.

However, to end on a cautionary note, it is often said that the greatest wealth, is health. If a relationship is so toxic or abusive that it is impacting on your wellbeing, a spouse should think long and hard about waiting for the economic climate to improve. The emotional damage caused by delay in leaving such a relationship can be irreparable. It can slowly eat away at your sanity and it is worth remembering that lost time is never found again.

About the Author
Rebecca Cockcroft
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