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How Watts Charges & Epstein Credits Impacts Divorced Homeowners

While going through the arduous process of a divorce, the reality is that you and your soon-to-be-ex-spouse have shared expenses that have to continue to be paid, and property that you jointly own, even though you no longer cohabitate.

Your mortgage, your car payments, your credit cards, your children’s private school payments—all of these expenses don’t just disappear. And what will you do with what you’ve paid off, such as your home or car? How do you account for one side having sole use of an item, or one party taking responsibility for paying a joint expense? For instance, what if you move out of your home, but your spouse stays? It doesn’t make sense that you should be saddled with the cost of the mortgage as well as your present living expenses.

This is why, due to two key court cases, California family courts recognize the need to adjust divorce settlements based upon how former spouses each pay for and make use of community property.

Watts Charges & Epstein Credits - Divorced Homeowners

‘Epstein credits’ allow one spouse to be reimbursed if they pay more than half of the cost of a piece of community property.

In 1972, Leon Epstein and his wife Elayne Cohodes divorced after 18 years of marriage. After the couple separated, Elayne and the couple’s children remained in the family home. Epstein, the sole breadwinner, was 100% response for making payments on the home and other community assets.

Eventually, Epstein came to believe that he was entitled to compensation for supporting his ex-wife, and took his case to court. His motion was denied, as California law at the time held that using personal funds to pay for community property was a gift. This was based on the assumption that despite being separated, ex-spouses would want to do what was best for the family as a whole.

After losing his case, Epstein then appealed to the California Supreme Court, which ultimately ruled in his favor in 1979. The court’s ruling was predicated upon the concern that, in situations where only a single ex-spouse bore the brunt of shared expenses:

[A]pplication of the no-reimbursement rule will discourage payment of community debts after separation, exacerbate the financial and emotional disruption which all too frequently accompanies the breakup of a marriage and, perhaps, result in impairing the credit reputations of both spouses.

Due to the court’s ruling, when a spouse uses their own funds to pay the costs of something they don’t have full use of, they are entitled to compensation. Thus, if Spouse A pays $1,000 per month on the mortgage of a house that only Spouse B lives in, Spouse A is owed $500 for every mortgage payment they make.

A spouse may be entitled to Epstein credits for payments on a variety of shared debts, such as home mortgages, car loans, credit card debts, and so on. However, there are some exceptions. If there is proof that both parties agreed to non-reimbursement, or if payment was intended to be a gift, then Epstein credits are not owed.

In addition, if the paying spouse has access to the shared property, and their payments did not substantially exceed the value of the use they made of that property, then are not entitled to Epstein credits. If you have 80% use of property for which you bear 100% of the costs, you will have a tough time collecting Epstein credits.

But there are occasional exceptions to this exception. For instance, if one party is more or less obligated to continue making payments on a home, and lives there, they may be entitled to Epstein credits if it can be shown that they could have lived elsewhere for significantly less.

But all of this involves compensation for the paying of existing debts. What if a piece of property has already been paid off completely, but only one-half of a divorced couple is able to make use of it?  Or what if the fair market rental value of community property exceeds the mortgage payment?

When one ex-spouse makes exclusive use of a piece of community property, they may be compelled to pay ‘Watts charges’ (also known as ‘Watts credits’) to the other ex-spouse.

In 1979, John Watts and his wife Carol were divorced after a marriage of 4 years. After the divorce, John Watts remained in the family home, and also maintained control of a medical practice he operated. Years later, Carol went to court, claiming that she was owed compensation for John Watt’s use of the family home, as well as his ‘occupation’ of the medical practice.

Ultimately, the California Court of Appeals found in re Marriage of Watts that in some cases, when one ex-spouse makes sole use of community assets—a home, vehicle, piece of furniture, etc.—the other spouse may be owed one-half of the asset’s value.

Watts charges are a little more complex than Epstein credits, as a court is not necessarily compelled to award them, and one party must notify the other ahead of time of their intention to seek a Watts charge. Essentially, you can’t blindside someone months or years after the fact.

Calculating the value of a Watts charge can also be a little challenging. For instance, when one ex occupies a home, they may be charged up to one-half of the rental value of the home, rather than half of what the mortgage might have been.

Obtaining Epstein credits and Watts charges can be difficult.

In order to have the best chance of successfully seeking payment from your ex-spouse, it’s necessary to have the assistance of a family law attorney who understands California divorce law, as well as the many precedents established in recent years. If you would like assistance in seeking compensation for community assets you have paid for after your divorce, or which you lost the use of, Toeppen & Grevious can help. For more information, contact us today by calling 916-400-4516, or sending us a message using our contact form.