While there are some basic rules surrounding debt division, discussed below, it can be a complicated area of law. Determining the character of debt (e.g., whether it’s a joint debt or separate debt), whether either spouse is entitled to reimbursement, and how to make an equal division is not always straightforward. Therefore, in many cases, it’s a good idea to consult with an experienced family law attorney for advice.
Overview of Division of Property and Debts in California
California is a “community property” state, which means that generally, assets acquired and debts incurred by either spouse during the marriage belong equally to both spouses. Unless the spouses entered into their own agreement as to the division of property and debts (e.g., a prenuptial agreement), a court will order that community property and debts will be divided equally between the spouses in divorce. While each asset and debt may not be divided in half, the goal is to end up with an equal division.An exception to this equal division rule arises when the value of the community debts exceeds the value of the community assets. In this situation, the law allows courts to order an unequal division of the debts by assigning the excess debts to the spouse who is in a better financial situation to pay them.
For more detail, see Dividing Marital Property in a California Divorce.
Characterizing Debts: Community Versus Separate Debts
When dividing a debt, the first task is to determine the debt’s character: that is, whether it’s “community” or “separate.”
In general, community debts are those incurred after the date of
marriage, but before the date of separation. Debts incurred during
marriage belong to both spouses equally, even if only one spouse
incurred them (eg., only one spouse signed the credit card slip).
For example, if during the marriage, one spouse purchased all of the children’s clothing and other necessary items using one credit card that was held in that spouse’s name alone, both spouses are still equally responsible for the charges made on that card. Similarly, both spouses are responsible for one spouse’s income tax obligation, as long as it accrued during the marriage.
Separate Debt: Debts incurred before marriage or after separation are separate debts and belong only to the spouse that incurred them.
Date of Separation
The date of separation is very important, because debts incurred after a couple separates are typically considered separate and will be assigned to the spouse that incurred the post-separation debt.
Determining the date of separation is not always straightforward. Sometimes, courts must hold a separate trial just to determine the date of separation, before any other matters can be decided. Under California law, there is a two-part test to establish the official date of separation:
1) First, there must be a physical separation between the spouses. Physical separation is easy to determine when one of the spouses moves out of a shared home. However, courts may also find a physical separation occurred when spouses began sleeping apart, for example, in separate areas of the same home.
2) Second, in addition to a physical separation, one of the spouses must have an intent to end the marriage. A temporary or trial separation will not satisfy this intent test.
Dividing a Mortgage
Dividing the family home and mortgage can be complicated. The most straightforward case involves the following scenario: a couple buys a home together during their marriage and uses only community funds for the purchase and mortgage payments. Upon divorce, this couple will be equally responsible for the mortgage. In this example, a court may order that the home be sold to a third party and the net sale proceeds be divided equally between the spouses.
Alternatively, the court may order that one spouse buy out the other spouse’s share in the home and refinance the mortgage so that buying spouse is solely responsible for the mortgage going forward (the selling spouse should not remain on the mortgage). In more complicated cases, there are some mixed community and separate interests in the home and mortgage. For example, one spouse might own a home before the marriage, and during the marriage the other spouse may contribute to the mortgage or pay for improvements to the home. Or, a spouse may use separate property funds to contribute to the down payment of a community property home. In these cases, a court may order reimbursement to the contributing spouse, if the funds for the contributions can be traced back to a separate property source.
Reimbursements for Post-Separation Mortgage Payments and Use of the Family Home
Lots of issues arise between the date of separation and the final divorce. Who will stay in the home? Who will pay the mortgage? When a couple separates, and only one spouse continues to pay the mortgage for the family home, but doesn’t receive the benefit of living there, the paying spouse may be entitled to reimbursement.
Mortgage Payments Made after Separation: “Epstein Credits”
Under California law, a court can order that a spouse be reimbursed when he or she uses separate property funds to pay community debt after the date of separation and before the divorce.
For example, if a spouse moves out of the marital home but continues to pay the mortgage with his or her post-separation income (or other separate property funds), the spouse can request reimbursement for some or all of those payments. However, the court will not order reimbursement under the following circumstances:
- the spouses agreed there would be no reimbursement for the payments
- the payments were intended as a gift
- the spouse making the payments continued to live in the home, and the payments were not substantially greater than the rental value of the home
- the payments were made in lieu of, or as a form of, spousal support, or
- if the court believes it would be unfair and unreasonable for the spouse to expect reimbursement.
The spouse seeking reimbursement must be able to show that the money used to pay the mortgage was from separate property funds.
Charges for Fair Rental Value for Exclusive Use and Possession of Family Home after Separation: “Watts Charges”
In contrast to reimbursement for Epstein Credits, a spouse who has exclusive use and possession of the family home between separation and divorce may be assigned with “Watts charges” - the fair rental value of the home for that time period.In sum, if one spouse stays in the family home after separation, while the other spouse covers the mortgage, a court may award the paying spouse “Epstein credits,” and assign “Watts charges” to the spouse living in the home. In other words, spouses that have exclusive use and possession of the family home during divorce proceedings may end up owing the other spouse the equivalent of one-half of the fair rental value for the entire period of possession.
Again, this can be a complicated area of the law, so it’s a good idea to consult with a family law attorney for more information and advice.