Divorce can bring financial and emotional heartache - and it can be devastating. For Connecticut housewife Margaret Spenlinhauer, the turmoil lasted 18 year - time she spent searching for proof that her ex-husband had hidden big money from her before they divorced. Spenlinhauer ultimately got a marital settlement of $15 million, a far cry from the original agreement of $1.75 million. Forensic accountants and the right lawyers - and the money to hire them - might have helped Spenlinhauer find the evidence and get her money a lot faster.
Enter Balance Point Divorce Funding of Beverly Hills, Calif. The company advances divorcing spouses money to pay household expenses, lawyers, forensic accountants and other professionals. In return, the firm takes a share of the larger settlements its clients hope to win.
Litigation funders have a reputation for taking as much as 60% of a client's eventual settlement. That's enough to make anyone leery of the entire industry. However, divorce funders have been less aggressive, and financial planners say that they may be a potential tool for clients - albeit one of last resort.
Laura Gilman, president of LGA Financial in Los Angeles, says when large sums are at stake, she can foresee recommending divorce funding to a client whose spouse is hiding assets, has illiquid or offshore assets or owns a business with very subjective values. "The reward could be significant," she says.
But the numbers must make sense, since the costs will come out of any divorce settlement. "Anyone who is considering this needs a lawyer who is not a divorce attorney to look at it as a contract," says Karen Altfest, executive vice president of client relations at New York-based Altfest Personal Wealth Management.
Lawsuit lenders have as much as $1 billion invested in lawsuits, according to industry estimates reported in December 2010 in The New York Times. Hedge funds and banks have gotten into the act, at first funding personal injury cases but eventually expanding to investors' claims of securities fraud and other kinds of disputes where one party is much shorter on cash. A handful of companies in England and Australia fund divorce cases, offering loans.
In the U.S., the divorce funding industry is very new. Balance Point opened four years ago. Founder Stacey Napp says her charge is "always less than a lawyer's contingency fee," which is typically a third of a settlement.
A client who receives nothing - an unlikely possibility - also owes nothing. "If they don't do well, we don't do well," Napp says. Balance Point expects to resolve its first client settlement this summer.
Balance Point has one U.S. competitor: BBL Churchill Group. Headed by Brendan Lyle, who co-founded a large divorce funding firm in Australia, Churchill began lending late last year from its New York headquarters, charging interest between 14% and 18%.
Napp began Balance Point Funding with money from her own contentious divorce settlement, litigation she paid for with loans from family and friends. "That lead to my 'Aha!' moment," she says. "If I hadn't had those resources, I would have received a diminished percentage of what I was entitled to."
She began signing clients about a year and a half ago; so far the company has helped 16 of them navigate contentious, high-stakes divorces. Balance Point clients typically have already borrowed money from family, friends and credit cards. "They're realizing, 'I'm out of every penny I can beg, borrow or steal and I'm no further along,' " Napp says. "We don't hear from people who are living in $10 million homes and still going to the country club. We get the people who are deciding between groceries and putting gas in the car."
One woman who received a house after she and her husband first separated had drawn down on her equity to pay her living expenses and fund legal fees, and had run out of money. With Balance Point's help, Napp says, she can pay a litigation team - commercial lawyer, family lawyer, fraud examiner/forensic accountant, as well as an expert in the husband's professional field.
Another client alleges that her husband physically abused her and had substance abuse problems. So far, the client says, her ex-husband has ignored court-ordered support and thumbed his nose at discovery efforts. In that case, Napp says, the legal team hopes to ensure that support already awarded is actually paid.
The typical divorce funding client is a woman with a marital asset pool of between $4 million and $5 million that she can't tap for expenses. The assets are often tied up in a business that the husband controls.
"Oftentimes, a spouse involved in a divorce has no idea what assets could be hidden or what the true valuation of a business might be," says Garth Scrivner, a senior investment counselor at StanCorp Investment Advisors in Albuquerque, N.M., and a certified divorce financial analyst who has done research for forensic accountants. The business may be on the edge of a boost in value.
Scrivner recalls a case in which a husband who ran a franchise group signed a business agreement the day after the divorce. "The value of the business went up 25% to 30%," he says. "That's a lot of money to leave on the table."
Before accepting a client, Napp's team considers whether cash and help for the battle will actually lead to a better settlement. "We look at assets, see if they've given up any entitlements, whether there are pre- or post-marital agreements or quit claims on houses," Napp says. "Do they have competent people on their teams? What do they need?"
The company doesn't fund custody cases, stays away from potential clients who would prolong a legal battle simply to punish an ex and deliberately seeks clients who can be satisfied with something less than an ex-spouse's head on a silver platter. "We ask ourselves, 'Can we partner with this person? Can they be reasonable and rational and keep their eye on their goal?' We won't work with someone who won't ever settle," Napp says.
Once Balance Point accepts a client, the company helps her put together a professional team: forensic accountants, business valuation experts, attorneys and other experts as needed. A typical client might receive between $255,000 and $750,000 in funding.
"Our business is in understanding the legal process and identifying the clients who aren't picked up by traditional lenders," Lyle says. Churchill loans clients between 10% and 30% of the company's estimate of a client's worst-case settlement, "the settlement they'd get on their worst possible day in court in front of the worst possible judge," Lyle says.
Clients draw down the available loan balance to pay for legal help, business and property valuations, forensic accountants and other professionals, and perhaps living expenses. "We don't want people to be starved into premature settlements," Lyle says.
A typical client has at least $400,000 in marital assets. "That's where it starts to become worthwhile," Lyle says, for both the client and for Churchill.
The company expects repayment regardless of a client's ultimate settlement size. The interest rate varies, by loan amount, available security and how close a divorce is to settlement, Lyle says.
Financial planners urge potential divorce funding clients to get second and even third opinions on their cases. How likely is it that they might win substantially larger settlements, given greater resources? Divorce funding probably isn't a good choice for a client with a precarious legal case, or for someone who stands to gain only a small amount over an ex's earlier settlement offer.
Remember, too, that a divorce settlement could be the biggest chunk of money a client will ever receive. The money may need to last a lifetime, either as a client's sole source of money or as an addition to future earnings.
What does the client want to do with the settlement? How long must it last? Will it be the only source of money from the marriage, or can the client expect to receive ongoing spousal and child support? Will the client rely on the settlement money to educate children? Fund a retirement plan?
Many divorce funding clients adopt simpler, less expensive lifestyles after settlement, Gilman says. Is your client willing to be one of them?
If it's possible to fill financial needs with a smaller settlement, a client might consider the lesser offer. Even if divorce funding might mean a bigger payout ultimately, it also typically means more stress, more time in court and more time thinking about the former spouse. A drawn-out battle is also difficult for a couple's children. A smaller settlement that's still adequate might be the best choice for a client who wants to move on.
Potential divorce funding clients must also decide whether a loan or settlement percentage is a better deal. Although Balance Point accepts the risk of no payment if there's no settlement, the firm is careful to choose clients with a solid chance of winning. Depending on the terms and individual circumstances, a loan might be preferable - or the other way around.
The key is to advise clients to make sure that their interests are aligned with all of their professional partners, including a divorce funding firm. In the emotional heat of a divorce, a long, cool look at individual finances is in order - just the thing that a competent financial planner can provide.
Ingrid Case is a Minneapolis financial writer and the author of Your Own Two Feet (and How to Stand on Them).