Q. My wife and I are getting our divorce with the assistance of a paralegal. That person has prepared a Marital Settlement Agreement. The paralegal says she cannot give us legal advice. There is a phrase in the agreement that says something about each of us waiving Epstein reimbursements. I have no idea what this means.
"Epstein reimbursements" deal with the question: "How do
we divide debts that we incurred during the marriage, where one of us
made payments
after we separated and up to the time of divorce?" The best family lawyers know the
answer - but most don't.
A common situation is that parties have credit card debt that needs to
be divided in the divorce. Say there was a balance of $10,000 owing to
American Express on December 31st, the day before your wife drank too
much at the office New Year's celebration and had an unfortunate tryst
with her boss - this isn't the first time this has happened, and your
New Year's resolution is to move out (sorry, I am just trying to be
colorful), and so you do move out the next day. Her reaction is to file
for divorce, because her boss looks way more interesting to her than you
do these days.
Under this example January 1 is your date of separation. From the date
of separation on, the earnings of either spouse are no longer community
property, or joint earnings, but instead these earnings belong to each
of you separately.
Family Code section 771.
Often where a credit card is in the name of one person alone, the other
spouse or domestic partner doesn't contribute to the payments after
separation - sometimes because they won't and sometimes because they
can't. But as between the two of you, the $10,000 is jointly owed
to American Express, even if the other spouse did not sign the credit
card application or is not named on the card, or on the statement. This
is also true whether or not both parties directly benefited from the use
of the credit card - for instance, maybe the $10,000 was charged by your
wife to buy shoes over the course of the past year to help make herself
feel better about the fact that you never have intimate conversations
with her any more (or for any other reason), or perhaps you charged the
card to add more chrome to your Harley Davidson Fat-Boy because your hairline
is receding.
If the card is not paid, American Express can pursue collection either
against the spouse who is the account holder, or against the community
property of both spouses.
Family Code section 910. If the credit card is in your name alone, it will be your credit that
might be ruined if the monthly installments are missed.
Now again, as between you and your wife, the general rule is that each
of you owe one-half of the credit card debt which means that all other
things being equal, in a property settlement or if a Judge is forced to
divide your property and estate, if one party is assigned 100% of the
debt the other owes a reimbursement of $5,000. Lawyers and Judges speak
of assigning the debt to one party or the other on the
"marital balance sheet" which implies a corresponding credit or right of set-off against the division
of some other item of property.
Circumstances When Not Entitled to Epsteins
There are, of course, exceptions. These exceptions frequently include (a) situations where a debt was incurred in breach of a fiduciary obligation owing the community estate or to the other spouse and (b) where one party retains the benefit of the property that the credit card was used to acquire (believe it or not, I am frequently asked about breast augmentations or other cosmetic surgeries - except in extreme cases, courts do not charge one party for these). For example, if when you learned of your wife's affair your reaction included flying to Las Vegas and having a wild weekend and you recklessly charged the $10,000 at the casino, this might be considered a breach of fiduciary duty and result in the entire $10,000 being your responsibility even though the two of you had yet to physically separate. Or, if instead you spent the $10,000 buying more chrome for your Harley and you expect to keep it in the divorce, then even though the $10,000 was otherwise a community obligation equitable considerations may result in the debt being assigned to you. If in the divorce the two of you decide to sell the Harley but the chrome you spent $10,000 buying adds only $2,000 in value to the sale's price, in that case the $10,000 remains a joint obligation because you neither breached a fiduciary duty nor retained a sufficient benefit that the law would charge you for it and the asset is being divided. Another common situation is where one spouse retains the furniture or refrigerator charged at Lowe's - in that case more of the debt may be assigned to that party.
Assuming you continue to make monthly payments of principal and interest
on the credit card up to the point of dividing the debt in a marital settlement
agreement (MSA), or if a judge makes the call for you both after a trial,
as a general proposition your wife owes you one-half of all those payments.
These are called Epstein credits or Epstein reimbursements in California,
and many other community property states have similar rules. These are
also called equitable reimbursements, meaning that the right to be reimbursed
is not absolute and certain but that the court has wide discretion to
grant the reimbursement or not depending upon fairness. Typically California
family law courts do grant the reimbursement so long as the parties benefited
equally (or the money was equally wasted).
The principle in California was first set forth in the case of Marriage
of Epstein (1979) 24 Cal.3d 76. It is to be distinguished from the rule
that the debt itself, if community, must be divided equally between parties
in divorce.
Family Code § 2550. It covers reimbursements rights that accrue between physical separation
and the date of ultimate division of the liability.
So, the agreement the paralegal has prepared includes an agreement each
of you is giving up any right to be reimbursed for debt related payments
made after separation. You are not being asked to waive your credit for
$5,000 if the $10,000 debt is assigned to you (unless there is a separate
provision assigning the credit card balance to you completely). You
are being asked to waive all the debt maintenance up to this point. It is
not an unusual clause in an MSA, but it may or may not be in your best
interests to agree to it.
Epstein credits take a variety of forms, and are not limited to credit
card debt. The Epstein case itself involved a husband who voluntarily
made the mortgage, insurance, and tax payments on the family residence
during the separation period. Wife and their son occupied the home. Up
to that point the law was that if one party used separate property (earnings
after separation) to pay community debt (the mortgage, etc., on the residence),
there was a presumption that this was intended to be a gift to the community
unless an agreement could be proved that it was not to be a gift.
Each party may have separate Epstein claims as to different items of debt.
Upon separating, it is a smart idea to get and keep copies of credit card
statements and statements for all liability accounts as of the date of
separation. From an accounting point of view, the date of separation is
a critical snapshot of a point in time. It is essential that the parties
maintain these records as proof of what the numbers were, and of what
payments were made afterwards.
Whether or not you should waive the Epstein reimbursements that might
be owing you is part of the give and take of negotiating a divorce settlement.
These are usually simple accounting issues, but not always.
If your Wife gets an attorney that attorney might try to convince you
to waive the Espteins, or hope that you don't understand the concept
or have it independently explained to you. In my experience where we are
speaking in terms of vanilla debt (meaning there is no questionable conduct
and the charges were incurred in the normal course), your wife's lawyer
would also agree that you are entitled to these reimbursements without
a fight if you know enough to insist.
There is an important flip side and hybrid of the Epstein reimbursement
concept - that of
Watts charges and credits. The deal generally with who pays for the beneficial
use of community property (i.e., the home) during the separation period,
once the divorce is finalized.
To learn more about Epstein reimbursements in California divorces, visit us here!
I address Watts issues separately.
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Author: Thurman W. Arnold
