POST SEPARATION ISSUES in California, Watts & Epstein credits
Divorce: POST SEPARATION ISSUES in California, Watts & Epstein credits
Payments of community debts during the pendency of the divorce case: right to reimbursement [Epstein Credits]
After the parties have separated and they do not intend to get back together [as opposed to a trial separation] the parties' wages become the separate property of the party earning those wages.
If a party then uses his or her income to pay credit cards, mortgages or other debts of either party that were incurred prior to separation, the paying parting may be entitled to reimbursement credits for those payments from the community. That means in the division of the community assets and debts, that party would be entitled to reimbursement for the payment. However, since they are also liable for the debt the net gain to them would be one half of the payment.
This right was established in the case of Marriage of Epstein (1979) 24 Cal.3d 76, 89, and is commonly referred to as an "Epstein credit." [now also codified in Family Code section 2626].
The "right" is not absolute. Courts have discretion in deciding whether to order reimbursement or not, and it is wise for the paying spouse to give written notice that they will be seeking such reimbursement before they make such payments.
Reimbursement is only ordered if the court deems it reasonable. Examples of situations in which it might not be reasonable to expect reimbursement include:
- When an agreement exists between the divorcing parties that the funds would not be reimbursed.
- When the spouse paying the funds intended them as a gift.
- When the money paid was used to take care of a spousal or child support obligation even if there was no order to do so.
When the money was used to pay a debt, to acquire or preserve an asset used by the paying party and the amount paid was not significantly more than the fair rental value of the asset. [E.g. when spouse paying mortgage occupied the residence, paying car loan for car the paying spouse drives, etc.]
Examples where it would probably be reasonable to expect reimbursement would be paying on credit card debt that was incurred prior to separation, paying the mortgage when not residing in the family home, or paying the car loan for the car used by the other spouse, or payment of other unsecured loans that were incurred prior to marriage.
Exclusive use of community assets; community's right to reimbursement for rental value [Watts Charge]
A "Watts" charge may exist to reimburse the community for the value of a party's exclusive use of a community asset after separation. Marriage of Watts (1985) 171 CA 3d 366, 374. If one party has benefited from exclusive use of community property assets post-separation, the other spouse may be entitled to reimbursement or an equalizing credit of the asset's rental value, in the division of the community assets and debts.
On the other hand, if the spouse in possession of a community asset such as the residence or car is also making the monthly mortgage or car loan payment, they will not be required to further compensate the community for its use, unless its rental value substantially exceeds the monthly payment.
And if the monthly payment equals or exceeds the asset's reasonable rental value, the paying spouse does not receive Epstein credits, unless the monthly payment "substantially" exceeds the rental value of the asset..
If you have further questions regarding post separation issues in divorce cases, please contact Martin "Jamie" Elmer, family law attorney in Berkeley, California, at (510) 644-2411 or by email, for a free initial consultation.