Dividing Divorce Debts
Dividing divorce debts can be as simple as one spouse assuming a loan to both spouses being required to execute documents creating new loans for a community asset. The following are some of the most common occurrences that couples encounter when dividing divorce debts.
Payment of One Spouse’s Credit Card Debt
Dividing divorce debts will include community debts. The community (the entity created by a marriage) is liable for all debts incurred during the marriage and prior to separation. See California, Family Code §910 for dividing divorce debt. It doesn’t matter whether the debt was incurred by one spouse for his or her own benefit or for the family. It also doesn’t matter whose name appears on the bill or the credit card statements. If it was incurred during the marriage and prior to separation, it’s a community property debt and both spouses are equally liable. This means that when the parties are negotiating a settlement and tallying the marital balance sheet such debts should be divided equally. A better option might be that one spouse agrees to pay off the joint debts in return for a greater share of the community property. The spouse paying off the debts can at least make sure that joint debts are paid, because as long as debts are jointly owed both spouses are financially responsible to the creditors.
Community Payments of a Pre-marital Debt
In dividing divorce debts, one spouse’s debts may not be included. When one spouse has a huge pre-marriage credit card debt that is paid off during the marriage, the community is entitled to reimbursement. The couple used community property earnings to pay off the credit card debt (which was one spouse’s separate property debt) which entitles the community to a reimbursement for the amount it paid to discharge one party’s separate property debts.
Separate Payments on a Community Debt
A married couple, shortly after the marriage ceremony, goes on their honeymoon and racks up a huge credit card debt. One spouse uses their brokerage account which was built up prior to the marriage to pay off the honeymoon credit card debt. The spouse who used their separate property to pay off community debts during marriage and before separation, uses separate property to satisfy a community debt is presumed to make a gift to the community.
Separate Payments to Acquire Community Assets
One spouse uses their brokerage account to purchase a home during marriage. There is one important exception to this rule. California Family Code §2640 provides that where one party uses their separate property for the acquisition of community property, the paying spouse has a statutory tracing right of reimbursement if the right has not been waived in writing. Contributions to the acquisition of property include down payments, payments for improvements, and payments that reduce the principal of a loan used to finance the purchase or improvement of property. They do not include payments of interest on a loan to purchase property, or payments for maintenance, insurance, or taxation of the property.
Separate Property Used for a Community Debt
If one spouse, after separation, uses their separate property earnings or property to pay off community debts, they are entitled to a reimbursement.
One spouse continues using a car purchased during marriage and the other spouse continues paying on the vehicle loan. The paying spouse can claim a reimbursement credit for all the payments made from the date of separation to the date of trial. California case law has developed the general rule that a spouse who, after separation, uses earnings or other separate property to pay pre-existing community obligations should be reimbursed out of community property upon dissolution. These are traditionally called “Epstein credits” after the California Supreme Court case that established the rule. The one exception to this rule is when the paying spouse is using the asset. That spouse is not entitled to reimbursement if the amount paid was not substantially in excess of the value of the use. This means that you cannot claim a credit for monthly payments of a vehicle you are using.
There are two other important exceptions to the Epstein Rule that a spouse who uses separate earnings or property to pay off pre-existing community obligations is entitled to a reimbursement. One is where there is an agreement between the parties that the payments will not be reimbursed, and two is where the payments were intended as a gift or as child or spousal support.
Use of Community Property Funds for Living Expenses
California case law provides that the community is entitled to reimbursement where one spouse uses community property to pay separate obligations after separation to the extent that exceeds a reasonable amount for child and spousal support. A reasonable amount would be the amount of guideline support that a court would order in an application for temporary child and spousal support.
Use of the Family Home After Separation
It’s often the case that after separation one spouse moves out of the family home (“the out-spouse”) while the other spouse stays in the home with the children (“the in-spouse”). The out-spouse, usually the husband, may offer to maintain the status quo by continuing to pay the mortgage payments and other payments such as property taxes to maintain the property. In such a situation, the in-spouse should be warned that there may be serious consequences of such an arrangement at the time of trial.
One consequence of this arrangement is that the out-spouse paying the mortgage payments may be entitled to Epstein credits because he or she is paying separate property earnings towards a community property debt unless there was an agreement to waive such reimbursements or such payments were a form of child or spousal support.
The other major consequence is that if the reasonable rental value of the family home is more than the mortgage payments, the in-spouse may be required to reimburse the community for the difference in these payments between the date of separation and the date of trial. These are called Watts charges after the case that established the rule. The general rule is that where one spouse has the exclusive use of community assets between the date of separation and trial, that spouse may be required to compensate the community for the reasonable value of that use.
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For more information on property division and dividing divorce debts, click on one of the following links:
Quit Claim Deeds Transmuting Property
California Property Declaration