| My spouse ran up huge credit card debts during the | | | | such a situation the in-spouse should be warned that |
| marriage. In dividing assets and debts in the settlement | | | | there may be serious consequences of such an |
| agreement who should be responsible for these | | | | arrangement at the time of trial. |
| debts? | | | | We've already seen one consequence. The |
| In California, Family Code section 910 provides that the | | | | out-spouse paying the mortgage payments may be |
| community is liable for all debts incurred during the | | | | entitled to Epstein credits because they are paying |
| marriage and prior to separation. It doesn't matter | | | | separate property earnings towards a community |
| whether the debt was incurred by one spouse for | | | | property debt unless there was an agreement to |
| there own benefit or for the family. It also doesn't | | | | waive such reimbursements or such payments were |
| matter whose name appears on the bill or the credit | | | | a form of child or spousal support. |
| card statements. If it was incurred during the marriage | | | | The other major consequence is that if the reasonable |
| and prior to separation it's a community property debt | | | | rental value of the family home is more than the |
| and both spouses are equally liable. This means that | | | | mortgage payments, the in-spouse may be required to |
| when the parties are negotiating a settlement and | | | | re-imburse the community for the difference in these |
| tallying the marital balance sheet such debts should be | | | | payments between the date of separation and the |
| divided equally. A better option might be that one | | | | date of trial. These are called Watt's charges after the |
| spouse agrees to pay off the joint debts in return for | | | | case that established the rule. 5. The general rule is |
| a greater share of the community property. The | | | | that where one spouse has the exclusive use of |
| spouse paying off the debts can at least make sure | | | | community assets during the date of separation and |
| that joint debts are paid because as long as debts are | | | | trial, that spouse may be required to compensate the |
| jointly owed both spouses are financially responsible to | | | | community for the reasonable value of that use. |
| the creditors. | | | | Consider this example. Bob and Jackie separate. |
| What if a married couple pays off one parties | | | | Jackie and the kids stay in the family home after |
| pre-marriage debts? | | | | separation. Bob agrees that he'll continue to support |
| Consider this example. Bob and Jackie get married. | | | | the family and pay the mortgage and other expenses. |
| Bob has huge credit card debts that he incurred | | | | The mortgage payments are $1,500 per month. If |
| before the marriage. Bob and Jackie want to improve | | | | Jackie had to pay the fair market rent for the property |
| their credit rating so they can buy a house. They | | | | she'd pay $2,500 per month. Bob pays the mortgage |
| agree to pay off Bob's debts. However, once they are | | | | for 10 months from the date of separation to the date |
| debt free, Bob files for dissolution. In this case, Bob and | | | | of trial. Bob could argue that he should be re-imbursed |
| Jackie have used community property earnings to pay | | | | Watt's charges of $10,000 ($2,500 - $1,500 x 10). In a |
| off Bob's separate property debt. California case law | | | | division of community property he'd be entitled to an |
| states that the community is entitled to a | | | | extra $5,000. Bob could argue that he should also be |
| re-imbursement for the amount it paid to discharge | | | | entitled to Epstein credits of a further $15, 000 ($1,500 |
| one parties separate property debts. 1 So in the above | | | | x 10) which would increase his share of community |
| example, the community is entitled to a reimbursement | | | | property by $7,500. |
| for paying Bob's debts. | | | | This would mean that Jackie's entitlement to |
| What if one party uses their separate property to pay | | | | community property would be reduced by $25,000 |
| off community property debts? | | | | when she thought that Bob was supporting her and |
| In this example after they get married Bob and Jackie | | | | maintaining the status quo? Isn't this grossly unfair? 7. |
| go on vacation and rack up huge debts. Jackie dips | | | | You'd think so but that didn't stop the Court of Appeal |
| into her brokerage account which she built up prior to | | | | awarding Epstein credits and Watts charges in similar |
| the marriage to pay off the vacation debts. In this | | | | circumstances in In re Marriage of Jeffries (1991) 228 |
| case, Jackie has used her separate property to pay | | | | Cal. App. 3d 548. But wait a minute. Isn't there an |
| off community debts. California case law states that a | | | | exception to the rule where payments are made "in |
| spouse who, during marriage and before separation, | | | | lieu of spousal support?" The answer is yes "but" this |
| uses separate property to satisfy a community debt is | | | | has to be clearly spelled out before the Court will treat |
| presumed to make a gift to the community. 2 So in the | | | | such payments as support. In Jeffries, there was even |
| above example, Jackie is not entitled to a | | | | an Order of the Court that said the payments were "in |
| re-imbursement for paying the community vacation | | | | lieu of spousal support." However, the Order also said |
| debts. | | | | that the Court retained jurisdiction to characterize |
| There is one important exception to his rule. Family | | | | these payments and determine whether the Husband |
| Code section 2640 provides that where one party | | | | should be entitled to reimbursements. |
| uses their separate property for the acquisition of | | | | In another case the Court of Appeal reached exactly |
| community property, the paying spouse has a | | | | the opposite conclusion to Jeffries. 6. In this case the |
| statutory tracing right of reimbursement if they have | | | | husband also paid the mortgage pursuant to a |
| not waived the right in writing. Contributions to the | | | | temporary court Order "in lieu of spousal support" and |
| acquisition of property include downpayments, | | | | at trial claimed Epstein credits and Watts charges. The |
| payments for improvements, and payments that | | | | Court of Appeal held that public policy and the |
| reduce the principal of a loan used to finance the | | | | language of the Court order required that the Court |
| purchase or improvement of property. They do not | | | | deny the husband's claims for Epstein credits. The |
| include payments of interest on a loan to purchase | | | | Court then decided that since the wife was, in effect, |
| property, or payments for maintenance, insurance, or | | | | paying the mortgage she would not have to pay any |
| taxation of the property. So in the above example, if | | | | Watt's charges because the monthly mortgage |
| Jackie had used her separate property brokerage | | | | payments were the same as the fair market rental |
| account to pay off the principal on a joint mortgage or | | | | value of the home. |
| for a downpayment she would be entitled to a | | | | The only solution to this mess is for the parties and |
| reimbursement of that amount. | | | | their attorneys to agree early on in the proceedings |
| After separation one spouse uses their separate | | | | whether a spouses payment of community debts |
| property earnings or property to pay off community | | | | (such as the mortgage) and one spouse living in the |
| debts. | | | | family residence should be treated as spousal support |
| In this example after Bob and Jackie separate, Jackie | | | | which does not generate Epstein credits or Watt's |
| continues to drive the BMW which was purchased | | | | charges. If it's treated as spousal support any |
| with a loan during the marriage. Bob continues making | | | | agreement or Order should contain explicit language |
| the loan payments on the car. Can Bob claim a | | | | that mortgage and other payments by the out-spouse |
| reimbursement credit for all the payments he makes | | | | and exclusive residence by the in-spouse in the family |
| from the date of separation to the date of trial? | | | | home "shall be treated" as spousal and child support |
| California case law has developed the general rule that | | | | and the paying spouse shall not receive any |
| a spouse who, after separation, uses earnings or other | | | | reimbursements such as Watt's, Epstein, Jeffries |
| separate property to pay pre-existing community | | | | credits and charges. |
| obligations should be reimbursed out of community | | | | Who is responsible for credit card debts? |
| property upon dissolution. 3 These are traditionally | | | | Family Code 2623 (a) provides that debts incurred |
| called "Epstein credits" after the California Supreme | | | | after separation but before the judgment of dissolution |
| Court case that established the rule. | | | | are confirmed to the spouse who incurred the debts if |
| Under this general Bob could, in theory, claim credits for | | | | they are for "non-necessaries of life" of the spouse or |
| all the payments he makes on the car loan after | | | | the minor children. If they are incurred for the |
| separation. But what if Bob was driving the car and | | | | "necessaries of life" of the spouse or the minor |
| making the payments. Wouldn't it be unfair for Bob to | | | | children, then they will confirmed to either spouse |
| have the use of the car and also claim reimbursement | | | | according to each parties needs and abilities to pay |
| credits? That's what the Court said in Epstein. It laid out | | | | when the debts was incurred, unless there's a written |
| an exception to the general rule where the paying | | | | agreement or order for support. |
| spouse also uses the asset and the "amount paid was | | | | Generally, debts incurred during the marriage shall be |
| not substantially in excess of the value of the use." So | | | | divided between the parties. However, Family Code |
| this means that Bob could not claim credits for the | | | | 2625 gives the court the power to assign a debt |
| monthly payments if he drives the car but probably | | | | incurred during the marriage to one spouse if it "was |
| could claim a credit if he paid of the entire loan. | | | | not incurred for the benefit of he community." 8 |
| There are two other important exceptions to the | | | | Further, Family Code 2602 provides that the court |
| Epstein general rule that a spouse who uses separate | | | | may also award an offset against a party's |
| earnings or property to pay off pre-existing community | | | | community share if it finds that amounts were |
| obligations is entitled to a reimbursement: (a) where | | | | deliberately misappropriated by a wrongdoing spouse. |
| there is an agreement between the parties that the | | | | Footnotes: |
| payments will not be reimbursed, and (b) where the | | | | 1. Marriage of Walter (1976) 57 Cal. App. 3d 997. |
| payments were intended as a gift or as child or | | | | 2. See v. See (1966) 64 Cal. App. 2d 778. In Re |
| spousal support. | | | | Marriage of Nicholson (2002) 104 Cal. App. 4 289, the |
| After separation one spouse uses community | | | | Court of Appeal held where Husband had used |
| property funds to pay of their living expenses. What | | | | $30,000 that his mother had given him as a gift (i.e. |
| are the consequences? | | | | separate property ) to pay off the credit card ( |
| In this example, Bob and Jackie separate and Bob | | | | community property debts) so they could qualify for a |
| agrees to pay $1000 per month in support and | | | | loan to buy a house, he was not entitled to a |
| "whatever else you need out savings." Jackie takes | | | | re-imbursement. |
| out $1,000 community property from the joint bank | | | | 3. In re Marriage of Epstein (1979) 24 Cal. 3d 76. Also In |
| account to pay various living expenses. California case | | | | Re Marriage of Tucker (1983) 141 Cal. App. 3d 128. |
| law provides that the community is entitled to | | | | 4. Epstein, above; In re Marriage Stalworth (1987) 192 |
| re-imbursement where one spouse uses community | | | | Cal. App. 3d 742. |
| property to pay separate obligations after separation | | | | 5. In re Marriage of Watts (1985) 171 Cal. App. 3d 366. |
| to the extent that exceed a reasonable amount for | | | | 6. In Re Marriage of Garcia (1990) 224 Cal. App. 3d |
| child and spousal support. 4 A reasonable amount | | | | 885. |
| would probably be the amount of guideline support that | | | | 7. This is the conclusion of one Family Law |
| a Court would order in an application for temporary | | | | Commissioner: "It is fundamentally unfair for one |
| child and spousal support. If that amount were $1,500, in | | | | spouse to move out and to allow a post-separation |
| the above example, Jackie would have to reimburse | | | | living arrangement to stabilize on one set of financial |
| the community $500 ($2,000 - $1,500 she received). In | | | | assumptions and then, without warning to the other |
| the division of community property she would receive | | | | spouse, introduce for the first time at trial a concept as |
| $250 less in community property. Since this rule flows | | | | pernicious as a Watts credit claim to set up an entirely |
| from Epstein, the parties can waive the rule in writing | | | | different set of financial assumptions." Commissioner |
| and agree that such payments shall not reduce the | | | | Richard Curtis (2003) |
| community estate. | | | | 8. Marriage of Cairo (1988) 204 Cal. App. 3d 1255. |
| After separation one spouse stays in the family home | | | | Gambling debts incurred on credit cards during |
| while the other spouse pays the mortgage. What are | | | | marriage assigned to Husband. |
| the consequences? | | | | © 2007 Warren R. Shiell. All rights reserved. The |
| It's often the case that after separation one spouse | | | | information contained in this website is an |
| moves out of the family home ("the out-spouse") while | | | | "Advertisement." It is for informational purposes only |
| the other spouse stays in the home with the children | | | | and shall not constitute legal advice. Nothing in this |
| ("the in-spouse"). The out-spouse, usually the husband, | | | | Website shall be deemed to create an Attorney-Client |
| may offer to maintain the status quo by continuing to | | | | relationship. An Attorney-Client relationship shall only be |
| pay the mortgage payments and other payments | | | | created when this office agrees to represent a Client |
| such as property taxes to maintain the property. In | | | | and a Client signs a written retainer agreement. |