Recent Posts in Debts Category

Q.  I'm separated from my ex-husband, and we are in the process of a divorce. He has asked me to file jointly on a 2010 return, and I am wondering if this is a good idea. Any suggestions?

Trudy

Q.  I am considering filing for divorce, and am beginning to pencil out what the division of our assets and debts might look like.  What is a good way to go about this?

• Use net value numbers, i.e., equity in homes and automobiles.  Secured debt is subtracted from fair market value - it is not divided as unsecured debt would be.  If you take the house, you take 100% of the mortgage.

• Be sure to use realistic fair market value numbers.  Don't make your final decisions based on Zillow.  If your assumptions are flawed, your balance sheet analysis will be of limited use.

• Use wholesale Kelly Blue Book values for cars or at least make sure whatever yardstick you use is consistent for both parties.

• Obtain accurate and current pay-off information as to debts.  Typically that will be the value of the debts on the date they are assigned, as adjusted for Epstein Credits. 

• Don't treat apples and oranges as apples.  For instance, list pension assets as a class separate from other assets - the present value of IRA's, 401k's, and other defined contribution plans is always different than the present value of a bank account.  These pension accounts are not valued in real dollars but must be discounted, and that may require a pension forensic or CPA.

• Don't include separate property (the other spouse may dispute that characterization).  Pure SP doesn't go on the marital balance sheet. 

• Assign the debts, placing those numbers in parentheses to ensure they are subtracted and not added in your running total.  Remember that it doesn't matter in whose name a credit card is parked.  If a debt was incurred during marriage the general rule as between spouses is that each owes 50-50.

• Separate property debts don't go onto the balance sheet because they don't get evenly divided and if they were listed you may inadvertently charge yourself for half.

• Use total values rather than 1/2 community values.  These numbers get divided as one of the last steps.

• Don't include support or support arrears.

• Include Epstein credits.

• Calculate and note Watts' and Jeffries' claims

• List professional practices and businesses but realize you probably have no practical way to put a number on them, would be entirely guessing as to their value, and would probably be wrong anyway.  Understand that business are worth more than the sum of their balance sheets or book values.

• If you share this document with your spouse, be sure to write "Confidential Evidence Code section 1152 Materials" on it, which makes them inadmissible as evidence against you.  Otherwise you may find yourself stuck with your preliminary numbers when that is not what you intended.

• Realize that if you share this document, no matter how preliminary it is, with your spouse you will be creating in them expectations concerning value or division that they may become stuck on.

• Be careful how you treat negative equity on property.  For instance, if you own a car that is worth $15,000 but you owe $25,000 and want that vehicle awarded to you, the other party will not be charged for one-half of the $10,000 in negative equity.  

• Leased vehicles should be identified but have no value.  I believe it is a good idea to list everything that you own or owe whether or not it has a value or can be valued at that time, since this list becomes an important road map for you and your lawyer.

• Make a note of alleged breach of fiduciary duty claims, but don't value them.

• Don't include your separate property.  Include their separate property if you claim it to be all or partly community, but understand those aren't real numbers until a judge rules.  

• Don't leave the document lying around where someone else might find it.

• If property is held in one spouse's name alone but a mortgage or taxes were paid during marriage, or if it was improved or refinanced during marriage, understand that the community probably has some Moore-Marsden interest in that property but that you will have great difficulty figuring out what that is without expert assistance.

• Similarly, if one spouse owned property (i.e, real estate) prior to marriage and the other was placed on title during the marriage, note to yourself that the property has community and separate property attributes and understand you will need more information or help to value those competing interests.

• Make a note of all separate property contributions you made for the acquisition or improvement of any property.  These are called Family Code section 2640 credits.

• List all other reimbursements due to the community.  For instance, there are many situations where the community property is used to pay one party's separate obligations (i.e., child support from a previous marriage) and if you know to assert the claim the community may be entitled to a reimbursement.

• List consumer goods like furniture at garage sale prices unless there is something truly special about the items.  Nothing is valued at its purchase price or even its replacement cost new.

• Be sure to include loans from parents, work, or family members that were made during the marriage and assign those that relate to your family or work to you.

• Make a note of any gifts to one or the other of you alone that were used to purchase or improve community property, whether they were received before or during the marriage. 

• Look at your bank balances at the date of separation and assign those balances appropriately.  If your husband emptied the savings account the day before he walked out, list the amount he took under his column.

This is just a starting point and is valuable as a roadmap to get you thinking about what needs to be done to conclude the divorce.  Once you discipline yourself to begin to overcome any paralysis you might feel, the marital balance sheet will speak to you about what is important for you, what the issues are, and will give you some idea of what important paperwork you need to obtain to evaluate your interests now or in the future.  Get that paperwork at once.  You are going to have to do this exercise anyway once a legal actin is filed. 

This the some of the information that you must provide in your Declarations of Disclosure.  It is an efficient idea to use those forms from the beginning.  These California Judicial Council Forms include:

• The Fl-142 Schedule of Assets and Debts
• The FL-150 Income and Expense Statement
• The FL-160 Property Declaration

Getting started on this early will make any meeting with a family attorney cheaper and far more useful then if you've not even thought about these things.

To the extent you can determine values or ranges of values, add up the net equity in your column for the community property you want or get, and subtract 100% of the debts that are to be assigned to you.  Again, chances are there will be categories where you can't put a number on the items.  But if you had the numbers, then after totalling the total net to the other party, subtract the two net numbers.  One of you will show a higher number.  This number will reflect the over-credit amount to that person which needs to be equalized between you.  Divide this number by 2, and the person who netted more owes that resulting number to the one who received less.  This amount is called an "equalization payment."

This is just one way to do a marital balance sheet.  Often times there is no money to pay the equalization payment because all or most of the community is held in the form of personal and real property.  An equalization payment is no good to you unless you can collect it.  Perhaps you can get a promissory note secured by a deed of trust on the family residence that is awarded to the wife.  That is usually a bad idea - you don't want to become a bank, with all the attendant risks of default and depreciation.

Another option once you have these numbers are pencilled out is to go back and rethink how the property was divided.  Maybe you should take those Peter Max lithographs after all.  Maybe the residence or that vacant lot must be sold to raise money for the equalization payment.  It is frequently seen in Stipulated Judgments or Marital Termination Agreements.  It is not common in litigated judgments because courts generally must equalize the division at the time of trial, not in the future.  This is why property may be ordered sold to ensure an equal, current division of the estate.

If defined contribution pension plans exist these are a good place to find the money to assure the equalization payment is actually honored.  But a 401k with a net asset value of $100,000 might only be worth $80,000 after penalties and ordinary income taxes are charged on it.  Pensions can be divided without tax consequences (QDRO's) but if you are owed a $100,000 equalization, creating a new pension in your name and transferring $100,000 from the other party's interest in it is like being handed a check for $80,000. 

Q.  I have been occupying our family home alone since my wife left over a year ago.  I pay all the interest only mortgage, property taxes, and insurance with no help from her.  Does she owe me half of any of this?

A.  You may be owed you something, but not necessarily one-half of what you have paid out, and different categories of expenses may be treated differently.

This situation involves at least three potential legal concepts:

    * Epstein Credits (Payment of CP Debts Reimbursed)
    * Watts Credits (Reimbursement for Exclusive Use of CP)
    * Jeffries Credits (Combination of Epstein and Watts Reimbursements)

Epstein Credits

"Epstein credits" is a doctrine that holds that as a general rule courts must reimburse one spouse who uses earnings or other separate funds after separation to pay pre-existing community estate obligations.  Courts may not order this reimbursement if under the circumstances it would be unreasonable for the paying spouse to have expected reimbursement.  Where payments are made on account of a debt for an asset that the paying spouse was or is using and the amount was not substantially in excess of the value of the use, the Court may decline to order reimbursement.  This Blog addresses your question in terms of Watts and Jeffries credits that may be owing you upon divorce or legal separation - the prior blog details Epstein credits.  

Watts and Jeffries Credits

We speak in terms of "Watts credits" when one party has the exclusive beneficial use of community property.  When money is owed on that asset, "Jeffries" reimbursements or set-offs for the payment of that debt also come into play. On the one hand you are enjoying the use of a valuable jointly owned asset and should reimburse the community for that use; on the other you are paying something to a creditor for that use, and that amount should be deducted from what you owe the community.  Watts is a calculation for the value of what should be charged for an exclusive enjoyment of community property by one spouse; Jeffries combines the value of that use with reimbursements under an Epstein analysis.  Marriage of Watts (1985) 171 Cal.App.3d 366, 373-374; Marriage of Jeffries (1991) 228 Cal.App. 3d 548, 552-553. 

Family lawyers most often see Watts and Jeffries issues arise in disputes over residences occupied by one spouse alone.  In practice none of these concepts are typically applied to automobiles, although in theory they should be, or other consumer goods.  

While Epstein credits are generally viewed by trial judges to be mandatory reimbursements, allowing Watts and Jeffries credits is discretionary.  Having a working knowledge of your local judicial bench officer's attitude on these subjects is an important bit of information for you to obtain.

Watts credits and Jeffries credits are obviously implicated in your question since you occupy the house for which you seek mortgate and other payment credits and reimbursements. 

This is how Watts Credit issues typically arise - you and  your wife jointly own a home, and both of you are obligated on the mortgage.  Assume the monthly mortgage payment is $3,200 (interest only in your case), the taxes average $400/month, and insurance costs $1,200/year.  Mortgage payments are made on the 15th of the month, and she moves out on January 14, 2009.  You were unable to make the payment on December 15, 2008, so there are two payments due on January 15.  On January 15 you make these two payments, and then continue to make all these payments until the present time or the date of settlement or trial.  You occupy the residence the entire time.  You also incur charges for water for the landscaping, etc., along with the cable bill, electricity, phone and trash.  You have a gardner and a poolman that together amount to $250/month.

Hence, you are spending $3,700 on the mortgage, taxes, and insurance plus the $250 for upkeep, along with whatever you pay for utilities each month.  Over time this amount can grow to a considerable number. 

Assume you had to borrow the money to pay December late from your mother.  This is your separate property debt to Mom if borrowed after separation.  But because your wife lived at the house up until the day she moved which include all of January, you are entitled to the equivalent of an Epstein reimbursement.  Watts and Jeffries don't yet apply.  The obligation existed before separation, was paid after separation, and the source of payment was your separate property.  The community estate owed the payment, which means you owed one-half too (she also owes one-half the utilities charged during the same period as well that were paid with your separate property).

Watts and Jeffries credits answer questions how to deal with expenses you paid after she left where you had use of the home during some some of or the entire period.  Watts credits deal with the value of that use, and Jeffries deal with the value of the use less a reimbursement claim for the cost to you of that use.  Both parties can have these claims for the same property at different times, or one party may assert these reimbursements as against one property while the other may assert them as to another. 

What if instead of you living in the home after separation, it was rented to others but the rent didn't cover all the house related debt service?  The rents are deducted from the total and you each owe one-half of the shortfall.  If you advanced the difference, you are entitled to one-half back from your wife.

Watts' Analysis

So, where one party enjoys exclusive use of a CP asset how is the reimbursement calculated?

As a pure Watts credit analysis, assume a community property house is free and clear other than upkeep and utilities and that you lived there for a time - effectively rent free since there is no mortgage.  You can imagine how it might be unfair for you to receive this benefit without paying for it.  The amount of reimbursement you owe the community depends upon the property's fair rental value.  Fair rental value (FRV) is what you would expect to pay monthly to rent the same or a similar property on the open market in an arm's length tranactions.  It is usually proven by expert broker or appraiser testimony, but as an owner of property you are free to testify to what you think its fair rental value is (as is the other spouse).  Whether your opinion is believed or given weight by the court depends upon the assumptions you make in arriving at your opinion of FRV (as well as perceived credibility).  

If the FRV is $3,000/month, and you reside in the house for 15 months from date of separation to time of trial, the total value of your use is $45,000.  From this you would deduct fixed expenses like taxes ($400/month) and insurance ($100/month).  You would therefore owe the community $2,500 x 15 = $37,500, but since you own half the community the net reimbursement to the other party is one-half that amount.  You may also be able to deduct the gardner and poolman particularly where those payments help to maintain the asset itself.  You might even deduct repairs depending upon the circumstances (installing a solid gold toilet wouldn't qualify). 

All of these reimbursements are "Watts charges" to you.  They are "Watts credits" to the party to be reimbursed. 

Jeffries' Analysis

The more commmon situation is that some mortgage debt for the house you occupy is being paid monthly.  Assume it to be $2,000 combined (including mortgage, taxes, and insurance).  If the FRV is $3,000/month but you pay $2,000 monthly then the net benefit to you is $1,000 each month or $15,000 total.  You would owe a Watts reimbursement of one-half that sum, or $7,500, on the marital balance sheet or as a direct payment to your spouse.

This is a Jeffries situation.  Note that it assumes that these costs to you were paid by your separate property.  If instead you used community monies remaining in a bank account after the DOS to pay this debt (or CP funds from some other source) then you do not subtract that from the fair rental value because the community estate has already been charged.  
 
BTW, an interesting twist on this question these days involves what happens when there is a mortgage but the party in possession fails or refuses to pay it.  They are living there at no effective charge while the other spouse may be actually paying rent elsewhere.  In that case you should not receive a credit for one-half the debt you did not actually pay, but it is difficult to predict how a judge will handle this.  After all, you may continue to owe the money and have to repay it later.  Now what happens if you then decide to file a bankruptcy, so then never have to pay it because the debt is discharged?  That bankruptcy if properly drafted should also destroy any reimbursement claims of your spouse altogether.  Great unfairness can occur in these situations.  In my experience many of the legal rules for these reimbursement claims developed in a completely different economy and fairness and common sense is struggling to keep up with the new world order.

These days with the mortgage and real estate bust another situation frequently arises:  The amount a spouse pays to maintain the mortgage and related asset expenses may exceed the FRV of the property.  Should the other spouse be charged with half of this net loss, and so forced to underwrite some of it?

Assume in the illustration above that the costs remain the same, but the mortgage is $4,000/month.  Since FRV is $3,000, you are overpaying by $1,000.  Are you entitled to a credit back for one-half of the net loss?  In my experience most courts won't give it to you but make the argument anyway.  Courts seem to feel that if you choose to live in a place that you want the other side to help underwrite, when cheaper alternate arrangements are available, then your choice to stay there should not bind the other person.  The court cannot tell you what choices to make, but it can refuse to let you benefit unfairly by them.

This makes sense on at least one level - imagine that you have a large, beautiful, expensive home that is way under water, and that your estranged wife insists on continuing to live in it despite the fact that the costs to keep it are far in excess of what comparable lodgings would cost.  Naturally she wants you to absorb as much of this to whatever extent possible which lowers her incentive to move.  If she was allowed to stay and charge you for one-half the difference between a $10,000 mortgage and its $5,000 rental value, she might continue to reside in this losing, nonproductive asset if she effectively only paid $7,500/month after credit for your $2,500.

Conclusion

While Epstein reimbursements appear to be mandatory in dividing the community assets and liabilities, Watts and Jeffries credits are viewed as discretionary reimbursements.  Many judges don't favor these reimbursements and so exercise their disrection to deny them.  I tell my clients not to count on them in negotiating settlements, and many lawyers refuse to take the argument seriously when negotiating settlement.  Another reason why lawyers tend to treat them as inconsequential, besides bluffiing, is that they can be expensive to prove and so you are being tested as to whether you have the stamina or the money to assert these claims at trial.  After all, it is best to have forensic experts testify to them, and these individuals may include an accountant and a broker/appraiser.

One solution is to request the family court to bifurcate the issue so that a short, separate trial occurs on the Watts/Jeffries issues alone.  Once the amount of Watts or Jeffries credits is fixed by judicial decision you can now place it on the marital balance sheet in your settlement discussions on the remaining issues.

The success of a Watts or Jeffries claim are fact specific.  In doing justice and equally dividing the community estate, there is broad spectrum of fairness running from "its not big deal" to being "really unfair."  You will not get much traction where the consequence of not reimbursing Watts credits or imposing Watts charges is a small number.  But where one party enjoys the asset alone without paying creditors, a very strong argument exists in favor of finding reimbursements.

Finally, be sure to include reference to Esptein reimbursements and Watts and Jeffries in your Declarations of Disclosure to make it clear that you are asserting such a claim.  If you are the spouse in possession omit any reference to it.  It is not your job to assert that argument against yourself.

Thurman W. Arnold III
September 25, 2010
All Rights Reserved.

• Epstein Credits
• Watts Credits
• Jeffries Credits

This particular Blog addresses your question in terms of Epsteins - the next blog deals specificially with Watts and Jeffries credits. 

Epstein Credits

I have described Epstein Reimbursements in another Blog.  "Epstein credits" is a doctrine derived from the case of Marriage of Epstein (1979) 24 Cal.3d 76, 84-85.  It holds that as a general rule, courts must reimburse one spouse out of the community property who uses earnings or other separate funds after separation to pay pre-existing community obligations.  This commonly occurs with credit cards where there was a balance remaining when the parties separated that one or the other pays after that date.  Epsteins only apply to payments on the portion of a debt that existed at date of separation, and not new debt on an old card that was incurred afterwards.  The rule is not limited to credit cards but can apply to almost any class of debts.

Courts are required not to order this reimbursement if under the circumstances it would be unreasonable for the paying spouse to have expected reimbursement.  If there was an agreement that a party would not be reimbursed, if the paying spouse intended the payment as a gift, or when the payment is made on account of a debt for an asset that the paying spouse was or is using and the amount was not substantially in excess of the value of the use, the Court may decline to order reimbursement.  This idea of the value of use of some property acquired through debt that continues to exist after separation underlies the concepts of Watts credits and Jeffries credits, and is obviously implicated in your question since you occupy the house for which you seek credits and reimbursements.

So, Epsteins are almost always granted as to post-separation payments for expenses, or goods and services, that didn't leave a tangible asset behind that is now being exclusively enjoyed by only one of the two spouses. 

As an example of how this works if there is $15,000 owing Visa for that trip to Hawaii, some groceries, and a child's school tuition at the time of separation and one party pays it off or makes monthly installments on the debt with their earnings or other separate property after that date, a benefit has been conferred upon the community because a joint obligation has been extinguished or reduced.  That benefit must be equalized by a payment to the payor of one-half the amount paid or a credit or set-off against other property that gets divided.  One-half is paid because the paying spouse owed their half anyway.  Any portion paid before the DOS (date of separation) ordinarily will not be reimbursed. 

This is generally true even if only one of the parties actually took the trip to Hawaii, unless that trip was in breach of a marital or fiduciary duty (if the husband snuck off with his paramour to Hawaii, an argument exists that he should not be reimbursed for paying that portion of the debt over the wife's objection).  Family Code section 2625 directs courts to award a debt incurred by one spouse to them alone if debt was not "incurred for the benefit of the community."  Family Code section 2602 empowers courts to "award ... the amount the court determines to have been deliberately misappropriated by the party to the exclusion of the interest to any other party in the community estate."  FC section 2625 is a powerful and much underused statute (many attorneys seem to be unaware of it or try to bluff as though it didn't exist).

Compare this with a situation where a credit card was used to buy a dishwasher that the paying spouse possesses or receives in the divorce - since they are retaining a tangible asset it may not be fair to allow them to both keep the asset and get reimbursed for one-half its costs.  Applying Epsteins can become fairly fact specific.

In situations involving use of a family residence or other tangible assets that continue to exist after separation and which are used and enjoyed by only one of the spouses, an Epstein analysis provides only a part of the answer to the reimbursement question.  In effect first the amount of the Epstein reimbursements are determined, and then the question requires a Watts analysis to determine under equitable principles whether it is fair to actually order reimbursement and, if so, in what amount.

Hence, to resolve your issue you would begin by adding up the costs of everything related to the house that is spent to preserve or protect the asset.  Property taxes are included, but utilities are not.  The utilities you used after the physical separation are your obligation anyway, because they were not incurred during 'the marriage.'  (Please see the Blog Category "Physical Separation.")  Mortgage payments and insurance are considered, and probably the poolman or gardner as well.

Please continue on to the next blog for detailed infomation concerning Watts credits.

Epstein Credits and Fiduciary Duty Issues

Sometimes a spouse or domestic partner will raid the credit cards and take cash advances or buy a new wardrobe, or fix a car, during the weeks prior to separating.  If it later appears that their intention was to stick the other spouse for one-half of this expense, the presumption that this is a community debt (because incurred during marriage) may be overcome and so it may be assigned to the one spouse alone.  It is not fair to hold both parties responsible for debts incurred in anticipation of separation.

However, when one partner incurs a debt frivolously as opposed to recklessly before separation, in a situation not amounting to a breach of fiduciary duty - even over the prior objection of the other spouse - it is likely to be equally divided and Epstein reimbursements ordered.  Both spouses have, under California law, equal rights of management and control of the community property and community credit.

Courts in my experience are reluctant to find breaches of fiduciary duty in Esptein situations unless the behavior was fairly eggregious.  Charging 10 pairs of shoes at Macy's a month before separation may not be viewed as a big deal.  If the debt was incurred in pursuit of an illegal activity like supporting a drug habit or sex addiction, many judges are less reluctant to declare a breach. 

To illustrate another twist, if the credit card was used to pay the spouse's tuition expense instead a child's schooling as in my example above, it may also be unfair to charge the non-schooled parent with one-half the tuition portion of the credit card balance.  A court is likely to look at whether this schooling benefited the community in some way before splitting that debt betwen the parties - i.e., because of the schooling did the student spouse earn more money which was then contributed to the community standard of living and so confer a benefit on both?  Pure student loans are usually awarded to the party who incurred the debt as their separate property obligation. 

• The parties expressly agreed in writing to the contrary [FC §2641(e)]; or
• The contributions were for ordinary living expenses that would be incurred regardless of whether the spouse attended school, stayed home, or worked [Marriage of Watt (1989) 214 CA3d 340, 354].

If the loan is still outstanding at the time of dissolution, the balance is not divided but is instead assigned to the party who was educated or trained, except when the parties expressly agreed in writing to the contrary. [FC §2641(b)(2) (e).]

Nonetheless, the Court may reduce or modify the reimbursement and assignment of educational loans to the extent circumstances render such a disposition unjust, including the following [FC §2641(c)]:

• When the community substantially benefited from the education, training, or loan incurred for the education or training of the party. There is a rebuttable presumption affecting the burden of proof that the community has not substantially benefited from community contributions to the education or training made fewer than 10 years before the commencement of the proceeding. On the other hand, it is presumed that the community substantially benefited from community contributions to the education or training made more than 10 years before the commencement of the proceeding.
• The education or training received by the party is offset by the education or training received by the other party for which community contributions have been made.
• The education or training enables the party receiving the education or training to engage in gainful employment that substantially reduces the need of the party for support that would otherwise be required.

Professional licenses and education are not "property" that can be divided in divorce or legal separation in California.  Reimbursement for community contributions and assignment of loans under FC §2641 is the exclusive remedy of the community or a party for education or training costs and any resulting enhancement of a person's earning capacity.

However, importantly, the Court should consider the effect of the education, training, or enhancement, or the amount reimbursed, on the circumstances of the parties in ordering permanent spousal support pursuant to Family Code section 4320(b). [FC §2641(d).]

    * In-Kind Division: Each party takes one-half of assets such as bank accounts and stock in a corporation, and/or one-half of the debts.

    * Trade-off Division: You may stipulate to settle your property disputes, without regard to value, by agreeing one of yoiu will take certain items of property, e.g., the furniture, and the other will take other items, e.g., the car.

    * Piece-of-Cake Division: This method gets its name from the common situation where two children have a piece of cake to be cut in half. To avoid the argument over who gets the "bigger" half, it is agreed that one will cut the cake and the other gets to choose which piece he or she will receive. In the marital property context, one party makes up two lists of the property in question that he or she believes are equal, and the other party chooses which list of items she or he will take. (You may want to agree not to break up sets, e.g., a dining room set, a set of dishes, matching art works, etc.) The piece-of-cake method is particularly useful for dividing furniture and furnishing that usually have a real value to the parties far in excess of their fair market value. The method is also useful in short-term marriages for dividing wedding gifts.

    * One Values, the Other Chooses: One of you places a value on each item of community property in dispute and the other party chooses those items he or she will take at the stated value up to one-half the total value. Alternatively, the party choosing may choose any, all, or none of the items, with any items not chosen going at the stated value to the one who set the value. An equalization payment can be required. In dividing furniture and furnishings, an alternative to piece-by-piece choice is to list furniture and furnishings room-by-room, and each party chooses by room.

    * You Take It or I Will Take It: One party places a value on an asset at which that party is willing to let the other party be awarded the asset, or else the former will be awarded the asset at that value.

    * Appraisal and Alternate Selection: An appraiser is selected by stipulation to value each of the items in question. The parties then choose items alternately until all items are taken. The one to make the first choice can be designated by the flip of a coin. Another approach is to let one party go first and the other party then gets two selections, after which choices are made alternately. It is usually preferable to agree that sets not be broken up. It might be agreed that if a party takes a set it counts as that many choices, e.g., a dining room table and four matching chairs counts as five choices, and the other party then makes the next five choices.

    * Sale: The parties agree that the items in question be sold at a public sale or to a particular buyer with the proceeds divided equally, or in whatever other proportion is necessary to accomplish a satisfactory or equal division, considering the other marital assets or obligations each is receiving. For modest furniture or furnishings, the sale may be a garage sale.

    * Sealed Bid: Each of the parties submits a sealed bid on each item of property in dispute, using the same list. The bids are opened simultaneously and the one bidding the highest amount for an item gets that item valued at the figure he or she bid, with an equalizing payment to be made, if necessary. This method can also be used for disposition of the family home, other real property, or a family business that both parties have operated, where each seeks to have it awarded to him or her.

    * Interspousal Auction: This is a straight auction between the parties, usually with an agreed minimum incremental increase over the last bid being required. The high bidder gets the asset at the amount of his or her bid with an equalizing payment being made, if necessary. To the extent a major asset is involved such as a family business or real estate, the stipulation might provide that each of the parties have an advisor present during the bidding.

    * Arbitration: The valuation and division of the community property in question is determined by an arbitrator selected by the parties. The parties should understand that the arbitrator is not required to follow the law, and his or her decision, for all practical purposes, is final and not subject to appeal. Because arbitration usually takes much less time than a court trial, the parties might consider stipulating with your consent that you hear the case as an arbitrator.

    * Mediation: Mediation is greatly underutilized in family law cases. It can be a very effective and satisfying way for the parties to reach agreement on the value and division of their marital property.

    * Real Property: If both parties want community real property, one of the foregoing methods of resolution can be used. If neither wants it, it can be listed for sale with a broker stipulated to by the parties, at a listing price recommended by the broker. If one wants the property but the other feels that he or she is offering too little, the latter can list it for sale with a broker of his or her choosing. If the property does not sell within a specified period of time, the listing price will be periodically reduced until it reaches the figure where the net proceeds would be equal to what the other party offered. The property then goes to the offering party for the amount of the offer.

    * Combination: When more than one marital asset is in dispute, one of the foregoing methods might be used for one asset, while one or more other methods might be used for other assets.

Q.     If I marry is it possible to avoid any of my fiance's debt liability?

A.  Yes.  First, your separate property doesn't become liable for a spouse's premarital debt simply by marrying.  But community property as it comes into being does. 

Secondly, to the extent you or your spouse will incur debt during marriage, prior to marriage both can agree to eliminate or restrict the creation of community property as between you. This is accomplished through a prenuptial or premarital agreement.  Essentially you agree to restrict or eliminate the creation of community property in the first instance, since that will remain liable for debts incurred prior to (with some exceptions) and during the marriage, and so you can ensure that your separate property remains protected. 

None of this applies to debts you jointly incur - the joint credit card, the jointly purchased car, or the jointly refinanced home.  This is why creditors try to insist that both spouses sign loans. 

But you can modify your behavior in order to protect yourself by not signing. It is possible to enter a post-nuptial agreement which achieves substantially the same thing, although it won't necessarily change the character of debt incurred prior to its signing but it may nonetheless eliminate future community debt by eliminating community property.  Remember, as between the two of you, you cannot affect third party's rights who are not parties to your post marital agreement, and to do so may be considered a fraud upon creditors which means the agreement may be set aside and voided.

Q.  Am I liable for my husband's nursing  home bills?

A.  Yes, under most circumstances.

Community and both spouse's separate property is liable for the other spouse's "necessaries of life" while the spouses are living together, and even when they are living separately - unless they are living separately by agreement within the meaning of Family Code section 4302.  If this occurs at a time when there is no community property but the other spouse does have separate property, there is a right of reimbursement for a period of time (i.e., if the other spouse dies there is a time limit on seeking reimbursement). 

Note that spouses each owe a duty to support the other out of their own separate property if there is no community property.  Family Code section 4301.

"Necessaries of life" include food, shelter, clothing, and the expenses of a final illness.

Q.     My husband won't stop gambling. Am I liable for his gambling debts?

A.  The community property that the two of you own is liable as to satisfy his gambling obligations, assuming there is any left.   Whether you are liable to the Indian Casino or Las Vegas hotel beyond your share of the community depends upon whether you have an independent contractual relationship with them - i.e., a line of credit in your name. 

As between you and your husband, unless you consented to his gambling he may owe you (if your separate property is somehow attached to satisfy the debt) or to the community estate a reimbursement or indemnification right.   

If he is a professional gambler and this is his "work" the outcome would be different.  The outcome may also depend on whether the community benefited from the gambling, i.e., if winnings were used to support the community, then a court may deem it fair to share the obligation as to "losings".  

This right of reimbursement would similarly exist if he squandered money on drugs, or prostitutes, and so on - assuming you can prove it and trace the money!  The question is whether you consented and ripens when you can establish that his conduct violated fiduciary duties owing you.  One never knows, however, how a judge will treat this on a case by case basis but the law if moving towards greater accountability.

If his gambling does amount to a breach of fiduciary duties owing you as a result of your marriage or domestic partnership, you have substantial remedies.  Try our search at the top right of the page to learn about those topics.

Thurman W. Arnold III

Q.     Who is liable for debts that we assign between us in our divorce settlement?

A. After property is divided incident to divorce or legal separation it is no longer community property; it is the separate property of the recipient. This separate property always remains liable to pay your own debts no matter when they were incurred. Even if that debt is assigned to the other spouse in the divorce division, you remain liable on the debt as between you and the creditor.  Family Code section 916(a)(1).

Your separate property and what you receive at the time of the division is not liable for the other spouse's debts, whether incurred before or during marriage, and you are not liable for those debts unless the debt was assigned to you in the settlement.

If your property is nonetheless applied to satisfy your spouse's debts by a creditor, you have a further right of reimbursement against your former spouse, plus interest and possibly attorney fees.

Q.  Can the property I owned before marriage be taken to pay for my husband's unpaid child support from his first marriage?

Q.     Are my earnings liable for my spouse's debts incurred before marriage?

Q.    My Husband is being sued for a business debt.  I am not named in the lawsuit.  Am I still liable?

Q.    My Wife caused a car accident.  We were underinsured.  Am I liable if the wreck occurred before we separated?

Q.      If my Husband and I divorce, am I stuck with any of his student loan?

Q.     Am I liable for myspouse's pre-marital debt?

Q.     Is there a time limit on exercising my reimbursement rights?

Q.   What is meant by separation in California?

Q.  I have two children from a previous marriage.  I remarried two years ago, and my new spouse earns $8,500 month.  While my hours have been reduced during this recession and my monthly gross averages $3,500.  The ex is threatening to take me back to Court to increase child support based upon my new mate's income.  Can she do this?

A.  Of course ex-spouses can always take the other back to court, but that doesn't mean they will win.  We call these support modification proceedings.  In order to obtain a new order, she must prove there has been some material change of circumstances with regard to her needs, the childrens' needs, or your ability to pay a greater sum in support.

The key California statute on when and how new mate income can be considered is Family Code section 4057.5.  The basic rule is that courts cannot consider new mate or nonmarital partner income in the context of making child support or support spousal orders.  This means as a general proposition that your new wife's income of $8,500/month is not to be inputted into the support guideline formulas. 

There are two exceptions where new mate income may need to be disclosed and where it can be considered in setting child support:  1) Where there are "extraordinary circumstances" that would cause the exclusion of this income to create an extreme or severe hardship to a supported child.  However, if this hardship is shown, the court must first consider the effect of inclusion of new mate income on any other children including the new mate's children, and so that their interests trump the hardship to the child for which support orders are being sought.  2) By marrying somebody with high earnings, a spouse will pick up additional taxes based upon the other's income.  Since as far as the IRS and California Franchise Tax Board (FTB) is concerned, you are liable under community property laws for one-half of your new mate's income, regardless whether you file jointly, the added tax consequences upon this additional income can actually be the basis for a downward decrease in child support (County of Tulare v. Campbell) since there is less after tax income available to you from which to pay support.

There are very few reported California appellate decision on new mate income or which explain how FC section 4057.5 is to be applied.  In Marriage of Loh (93 CA4 325) a mother/former spouse convinced a trial court, based upon photos of the father's extravagant lifestyle (homes, cars, etc.) which were funded by his girlfriend's income and assets, to impute income to him for purposes of basing a child support award.  The appellate court reversed, stating "Evidence of lifestyle, particularly a lifestyle subsidized by a new 'nonmarital partner', is not a cheap substitute for proper discovery of income reported on tax returns."

In a very recent appellate decision (Marriage of Knowles (Oct. 2009) 178 CA4 35) a trial court was reversed after it accepted the former wife's argument that the community property income and assets of both he and his new wife should be used to determine his income available for support.  The trial court's mistake was include the half that belonged to the new wife, although it could have included just the half that belong to him.   There was no evidence of extreme hardship that justified considering the new mate's half. 

We’ve waited a long time for another case dealing with consideration of new-mate income under Fam C §4057.5. One of the few cases that has, In re Marriage of Wood (1995) 37 Cal.App.4th 1059 is cited here, but it came down in 1995. Neither the statute nor the cases provide any definitive answer regarding what actually constitutes either an “extraordinary case” or an “extreme and severe hardship,” although Wood seems to say that new-mate income can be considered where one of the parents is voluntarily unemployed or underemployed.

Rather than arguing for NMI (new mate income), a party seeking to have income assigned to a person who has remarried or is living with a nonmarital partner may find more success by arguing that income should be imputed to that spouse on the basis that they have an earning capacity which is not being realized.  For instance, if because your new spouse had sufficient income you chose to quit work or take a lower paying job it might appear you are shirking your support responsibilities.  Rather than charging you with NMI, a trial court could find that you had the ability to earn X dollars a month and so charge you for this phantom income by making that the basis for a support award.  Then, the community property (including your new mate's share) could be tapped to satisfy this obligation.

Incidentally, a California prenup can be an effective way to limit this exposure.