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If you’re going through a divorce then taking professional legal advice can obviously help you to achieve a better financial settlement. However, employing the services of a solicitor means you will have instalments to pay, often before, during and at the end of the process when your divorce is concluded.
If you’re concerned about how you will pay for your divorce, here are some borrowing options.
From friends or family
One of your options is to ask a friend or family member to lend you money to pay for your legal representation. If you’re asking someone you know to lend you money, it’s important to take the following issues into account:
- How long is the process likely to take? Your friend or relative will want to have an idea of when they can expect to get their money back. Litigation and divorce proceedings can last for months or even years, so it’s important that all parties have realistic expectations of when any money will be repaid. Your solicitor may be able to provide guidance.
- What happens if your friend or family member can no longer provide support? As the process continues, the person you are borrowing money from may need to stop their financial support. You’d ideally gain plenty of notice in order to find an alternative arrangement.
- If money is being loaned, make sure you draft an agreement in order that both parties are protected. A formal agreement will increase the chances of the loan being recognised by the Court as a debt you have to repay. It will also ensure the person lending you the money is protected and has an idea of the repayment schedule.
One of the main benefits of borrowing from friends or family is that you may not have to pay any interest on the money you borrow. In addition, the person may be relaxed about how you pay back the money, and when.
However, borrowing money from friends or family can damage a relationship if you’re not able to pay back what you owe. If you don’t have a formal loan agreement, it can be easy to fall out with the person lending you the money if you don’t repay it in the timescale you agreed.
If you need to fund legal costs and disbursements you could consider taking out a personal loan from your bank or building society.
Loans are typically available up to £25,000 and the amount you can borrow and the interest rate you will pay will depend on your personal circumstances.
Interest is normally fixed and your payments run for a set period (typically one to five years). You can typically pay off additional sums to clear your loan more quickly without paying significant penalties.
0% credit card
Many credit card providers offer cards that charge an initial interest rate of 0%. This means you don’t pay any interest on ‘purchases’ (such as paying a solicitor’s bill) for a fixed period. Typically you can borrow interest-free for up to around 12-24 months.
The amount you can borrow will depend on your personal circumstances. Lenders will impose a credit limit on your card, and so this is unlikely to be a way of borrowing a significant sum.
You will need to make a minimum repayment every month, based on the amount that you borrow.
It’s also important that you clear the amount you borrow as quickly as you can. While a 0% credit card can be a way of securing cheap borrowing in the short term, once your 0% period ends you can expect the interest on your borrowing to rise significantly – typically an APR of 20% or more. If you retain a balance at this stage it can make the borrowing very expensive.
In addition, if you fail to make the minimum repayment you may pay charges, and the card provider is also likely to remove the 0% deal from you.
Borrow from limited company if self-employed
If you’re self-employed and have your own limited company then you may be able to borrow from your company to pay for your divorce.
However, you can’t simply just withdraw money from your limited company to pay legal bills. There are three methods you can use.
1. Pay yourself a salary
If your company is registered with HM Revenue and Customs as an employer, you could pay yourself a regular salary through Pay As You Earn (PAYE).
Your company won’t pay any Corporation Tax on money you take as a salary, but you may pay Income Tax and National Insurance Contributions on this money.
2. Issuing a dividend
If you’re a shareholder of your business, you can take a share of the profit your business makes as a dividend payment.
The amount of dividends you take depends on the percentage of the business that you own. For example, if you are the only shareholder in your business you could take a dividend equivalent to all the company’s remaining income after deducting tax, costs and expenses.
You can take the first £2,000 of your annual dividend without paying any Income Tax or National Insurance contributions. Anything over £2,000 will incur Dividend Tax at your marginal tax rate.
You must hold a board meeting to declare the dividend, and minutes must be taken (even if you’re the only shareholder).
3. Use a Directors’ Loan
If you need to borrow money for your divorce, you can take it out of your company as a Directors’ Loan. You can use this to:
- Reclaim money you have put into the business – here, your loan account is in credit and you can reclaim this money with no tax charges.
- Borrow money that exceeds the amount you have put into the business – here, your loan account will be overdrawn and there may be tax implications.
You have to keep a record of these loans and they must be shown on your company’s balance sheet.
If you don’t want to borrow money from a bank or building society to pay for your divorce legal costs, you could approach a credit union. These are community loan providers that are owned and run by their members.
The interest you pay on a loan from a credit union is likely to be lower than other short-term loans, such as from a payday lender.
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The information on this website is to be considered a guide and is therefore not legal advice. You use this information with the understanding that Wiselaw does not accept liability for any direct or indirect losses as a result of anyone relying on or acting upon the information on this website. Whilst we endeavour to provide accurate information, Wiselaw does not accept liability for any errors or omissions on this website.