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Why some of America's wealthy are turning to divorce funding firms

Every month, millions of Americans either get out their checkbooks or go online to make payments on loans they took out at some point in time. Indeed, many people repeat this process several times, gradually paying off things like their homes, their education and their vehicles.

Interestingly enough, recent reports show that some wealthier Americans are now making regular loan payments to gradually pay off something entirely different: their divorces.

Indeed, these wealthy Americans are making payments to so-called divorce funding firms, which have been operating here in the U.S. for less than ten years.

What these divorce funding firms do is extend funds to a very select clientele -- otherwise wealthy divorcing spouses who have found their access to jointly held marital property stymied and, as a result, are temporarily low on money.

These funds, which enable these spouses to cover both living expenses and legal fees, are then repaid for months or years after a settlement is finally reached.

Different divorce funding firms, of course, have different lending terms:

  • One company makes nonrecourse advances, meaning one they cannot recover if no divorce settlement is reached, at a rate of 1 percent to 1.5 percent per month.
  • One company makes recourse advances, meaning they can recover even if no divorce settlement is reached, at a rate of 1 percent to 1.5 percent per month.
  • One company says it simply makes an investment in a divorce that entitles it to a set percentage of any divorce settlement.

As you might imagine, divorce funding firms are incredibly selective, loaning funds only in those cases where the parties involved have substantial assets, such that the divorce settlement ultimately secured will more than likely meet a certain financial threshold.

While cynics call out these companies for reducing the size of a divorced spouse's share of the marital property, company officials indicate that without their funds, a settlement could have been substantially less or perhaps even non-existent as the spouse would have had no choice but to capitulate.

It's certainly interesting to see divorce give birth to yet another industry. However, it's important to understand that divorce funding firms and the circumstances in which their services are needed are very much an anomaly and, more importantly, that the average person can rely on securing the services of a skilled and effective legal professional to fight for their rights.

Source: The New York Times, "Divorce funding firms help spouses expecting big payouts," Paul Sullivan, Feb. 27, 2015

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