How do reimbursement claims work in a California divorce?

Posted about 5 years ago. Applies to California, 5 helpful votes

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1

What are we talking about here?

As owners of a house, which is likely a community asset, you and your spouse both have the right to equal use of, and access to, the house. Upon separation, and until the date of trial and a final division of all assets, the community is entitled to continued use and access to this asset. By one of you remaining in the house after separation, and thereby preventing the other's access to the home, he/she is using this community asset for his/her separate purposes. By preventing the community's use of the asset, he/she will be charged with reimbursing the community for the value of the loss of the use of the asset.

2

What does California law say about this dynamic?

California family law contemplates that when a couple separates, thereby ending the community, each spouse is entitled to the benefit of the assets accumulated during the marriage. In the case of a house, such as the situation here, the "ideal situation" is one where both parties move out of the house and set up their own households using separate property funds they have accumulated post-separation. Once this has happened, the community asset is then rented out at fair market value, with each spouse receiving one half of the rental value. In turn, they would each then pay for one-half of the mortgage and carrying costs of the house from their portion of the rent, and would keep whatever amount remains.

3

An example ....

As an example, assuming that the house rents for $6,000.00 per month, with mortgage and carrying costs of $3,000.00 per month, each party would receive $3,000 as their portion of the rent, would then pay $1,500.00 as their portion of the costs, and would retain $1,500.00 per month as their income from the community asset. In this way, the community is fully reimbursed.

4

What happens if one spouse stays in the home during the period between separation and the conclusion of the divorce?

In the event that one spouse retains use of the community asset post-separation, such as wife's continued use of the house, the community is still entitled to the value of the asset. In the situation where a spouse is the one who is "renting" the home from the community, that spouse is obligated to reimburse the community for his/her use of the community assets post-separation, which works much in the same way as the rental of the home to a stranger.

5

What this means

This concept of reimbursing the community for post-separation exclusive use of an asset is known as a "Watts credit" and is the amount of money owed to the community to make up for the loss of income that could have been recognized had the asset been rented to a third-party. Whichever is the one who has remained in the home, he/she will be the one responsible for reimbursing the community for his/her personal exclusive use of the asset. The actual amount that he/she will owe the community will depend on the fair rental value of the home and the monthly carrying costs. I suggest that you retain an appraiser to determine the fair rental value of the home to avoid any later arguments over this figure.

6

There is a "reverse" to this concept as well....

In addition to the "Watts credits" that are owed to the community, both parties may also be entitled to "Epstein credits," which are reimbursements to the individual from the community. Whereas "Watts credits" are the rights of the community to reimbursement for a spouse's exclusive use and possession of a community asset, "Epstein credits" are the right of each spouse to receive reimbursement from the community for separate funds expended on behalf of the community, such as for payment of community debts. The courts have determined that it is possible for both credits to exist in a marriage, even if they work together to the detriment of a single spouse.

7

How do Epstein credits work?

In this case, while one spouse will owe the community money for his/her use of the home, the community may end up owing that spouse money for his/her payment of community debts with money earned post-separation. This would include his/her payment of the mortgage on the house, credit card debt accumulated during the marriage, and the pay down of car loans, etc... In turn, the community will owe the other spouse for post-separation payment of any community debts as well. You should keep track of all of these expenditures for the purposes of calculating these various credits when the case moves towards resolving these issues. Please understand that these credits continue to accumulate throughout the separation, and must be accounted for at the conclusion of the dissolution, either through the allocation and payment of the credits, or through a waiver.

8

What does this all mean?

The calculation of credits and reimbursements in the context of a divorce is in fact a very complicated process. There are MANY such areas in family law cases and you should be aware of their existence so that you will have a better understanding of what it means to say to your spouse "I want you out of here!" Those can be costly words. If you think divorce is in your future, find an experienced family law attorney who can give you advice and can help guide you through these waters.

Additional Resources

Feinberg & Waller, APC

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