In the current climate of sky high inflation, divorcees need to be aware of the ‘inflation trap’ and how to avoid it.
Maintenance orders made in family law proceedings are predicated on the ‘need’ of the receiving spouse (and any minor children, in the case of child maintenance ordered by the Court). As a result, the Court order itself may include an indexation provision – that is to say that the level of maintenance will rise each year in line with inflation (usually CPI, but sometimes RPI). Otherwise, in real terms, the value of the maintenance will decrease year on year even though the headline figure remains constant. Index linking is often agreed as part of a consent order (i.e. an order made by agreement). The paying party may be inclined to include it, as it should make a variation of maintenance application less likely. However, those whose incomes may not keep pace with inflation may be reluctant to agree. Some negotiate index linking up to a ceiling, or an increase commensurate with the percentage increase in pay.
Unfortunately, these indexation provisions are often forgotten in the years that follow the order being made. In other words, the receiving party falls into the ‘inflation trap’. Legally speaking, the onus is on the paying party to increase the payments in line with inflation, but it is of course in the interests of the receiving party for the increase to be implemented. This means that if the receiving party forgets about the annual increase (or does not want to 'rock the boat' with their ex) it is not in the interests of the paying party to implement unilaterally the increase (assuming they have not forgotten too).
Whilst the indexation deficit may not seem significant year on year (especially given the low level of inflation in recent years), over time the ‘indexation arrears’ can add up and can reach significant levels. It is not uncommon to see the sums owing reach six figures. A receiving party who realises they have fallen into the inflation trap may therefore believe that they are owed a significant sum of money to make up for the missed indexation.
The difficulty is that the Court’s permission is required to enforce arrears that are over 12 months old, meaning the receiving party will need to convince the Court that relief should be granted. Unhelpfully, the law on this area is not entirely clear. Some cases say that “special circumstances” are required. Other cases say a broader assessment is required which looks at the culpability and means of the paying party and the steps that the receiving party has taken to collect the arrears over time.
Regardless, in the classic example where the receiving party has simply forgotten about the indexation provision it is likely to be an uphill challenge to reclaim arrears which are more than 12 months old. It is self evident that maintenance is designed to meet needs, so it may be difficult for the receiving party to claim they needed the extra money when they did not notice its absence (although some may claim that they economised or paid the deficit from capital).
Those with recent maintenance orders should make a note to revisit the payments each year to ensure the correct amount is being paid, lest they fall into the inflation trap. Those who have already fallen into the inflation trap can escape and restore the maintenance to the correct level, but they will likely pay the price by losing out on some of their historical arrears.
UK inflation hits fresh 40-year high of 9.4% and ‘could hit 12% in October