Video Transcript
Welcome to FreeDivorce.com.
Christina: This is Christina.
Ed: This is Ed. Today, are going to talk about reimbursement claims. There are numerous types of reimbursement claims that a party can make during a divorce. In this video, we are going to discuss some of the most common reimbursement claims.
Ed: Christina, would you please explain what a Family Code section 2640 reimbursement claim is?
Christina: If you or your spouse used a separate property during the marriage to purchase a community property asset or improve a community property asset, then there may be a valid reimbursement claim under the provisions of Family Code section 2640. We gave a couple of examples of this type of reimbursement claim in a prior video that covered the “Division of the family residence”, where one party used pre-marriage savings for a down payment on the family home or where one party used inherited money to pay for the construction of a swimming pool for the family home.
When one party uses their separate property to do any of the following, there can be a reimbursement claim: 1) Purchase a community property asset, including making a down payment; 2) Paying for an improvement to a community property asset, or 3) Reducing the principal of a loan that was used to purchase or improve a community property asset.
Ed: Let’s say the mortgage payments on the family home are $4,000 per month and I use my separate property funds to pay the mortgage payments. If my wife and I get divorced, will I get a $4,000 credit for each mortgage payment I made?
Christina: No. Your reimbursement claim is limited to the amount that the loan principal is paid down. You don’t get any reimbursement for payment of the interest portion of the mortgage, which is typically the bulk of the payment. If your mortgage payment includes impounds for property taxes or homeowners insurance premiums, you don’t have a reimbursement claim for payment of property taxes or insurance. Just payment of principal. So, if you use your separate property funds to pay monthly mortgage payments, you can get reimbursed for that part of the payments that reduced the loan balance, but not the portion that went to mortgage interest, taxes, or insurance.
Ed: What if I used my separate property funds for a down payment on a house years ago and the house has appreciated over the years, do I get any interest on my down payment or do I get any part of the appreciation?
Christina: No. The amount of the reimbursement is without interest and without adjustment for changes in monetary values. For example, assume you owned a home before marriage. During the marriage, you sold your home and netted $200,000. You used the $200,000 for the down payment for the purchase of the family home that cost $500,000. You and your spouse took title to the family home in both of your names, as community property. During the marriage, the family home appreciated over a period of years. At the time of the divorce, the home is worth $1,000,000. Your reimbursement claim is limited to the original $200,000 amount.
Ed: So, even though we took title to the new house as community property, I still have a right to be reimbursed for my separate property down payment, correct?
Christina: That’s correct. It does not matter that you took title to the family home in both names, as community property. You still retain your right to reimbursement.
Ed: What if I used my separate property funds to make improvements to my wife’s separate property. For example, let’s say my spouse comes into the marriage already owning a house and during the marriage, I use my separate property funds to make improvements to my wife’s separate property house, do I still have a right of reimbursement?
Christina: Yes. Family Code 2640 also provides for a right of reimbursement if one party uses their separate property to acquire or improve the other party’s separate property.
Ed: If I am going to make a Family Code section 2640 reimbursement claim, do I have to prove that the money which was used, was actually my separate property funds?
Christina: Yes. Oftentimes, when a party raises a Family Code 2640 reimbursement claim, there is going to be a problem with tracing the claim. If you claim you used your separate property funds to acquire or improve a community asset, the burden of proof is on you to produce evidence that traces the use of your separate property to the purchase or improvement of the community asset. If you can’t produce the tracing evidence, which typically involves producing documents such as bank records and/or escrow closing statements, then you will likely lose your reimbursement claim. It is not uncommon to lose a reimbursement claim because the documents you need to trace the use of your separate property funds can’t be located or no longer exist.
Christina: Ed, would you please explain what Epstein Credits are?
Ed: After you and your spouse separate, one or both of you may use your separate property funds, such as your post-separation earnings, to pay all or part of community debts. If so, a reimbursement claim for “Epstein Credits” can be made. For example, one party may make payments on community credit card debts after you separated but before your case settles or goes to trial. Even if you are going through a divorce, creditors still need to be paid. One or both parties will have to step up and make payments to creditors while waiting for a divorce settlement to be negotiated. The party that pays the bills will be entitled to Epstein Credits.
Christina: Do Epstein Credits only apply to credit card payments?
Ed: No. Epstein Credits can apply to all types of post-separation payments made on community obligations including, but not limited to, credit card debts, payment of income tax liabilities, car payments, mortgage payments, home equity line of credit payments, etc.
Christina: What if one spouse pays all the bills after the parties separate because the other spouse and the children need support?
Ed: If the payments were made in lieu of support payments, then the court may deny all or part of the Epstein Credits. For example, assume a couple separates. The wife and the minor children stay in the family home. The wife does not immediately go to court and seek child support or spousal support order. Husband uses his post-separation earnings to pay the monthly mortgage payments, car payments, and various other bills but does not pay any support money directly to Wife. If during the divorce, Husband claims Epstein Credits for making said payments, the court will probably deny his claim on the grounds that the payments he made were made in lieu of support payments.
Christina: If I use my separate property funds, such as my post-separation earnings, to pay community bills, is there anything I should be doing to make sure I get the Epstein Credits?
Ed: Yes. If you use your separate funds to pay community debts after you and your spouse separate, it is very important to document your payments. Get a binder. Every time you make a payment on a community debt, make a copy of the bill you paid and a copy of the check you used to make the payment. Put the copies in the binder. You will need these documents to prove your Epstein Credit claims later on at trial.
Ed: Christina, would you please explain what Watts Charges are?
Christina: After you and your spouse separate, one party may make use of a community property asset and the use of that asset may have a significant rental value. For example, assume the family home is paid off. Assume the home has a rental value of $4,000 per month. Assume one spouse occupied the family home for a year at essentially no cost before the case goes to trial while the other spouse rented a similar home and paid $4,000 per month in rent. The first spouse would be subject to a “Watts Charge” in the amount of $4,000 per month for the fair rental value of the family home. The first spouse would owe the community $4,000 per month for the one-year period. If the family home had a mortgage that was $1,000 per month, then that cost, which is like and Epstein Credit, would be offset against the fair rental value for a net Watts Charge of $3,000 per month. The Watts Charge is owed to the community, not the other spouse, which means the other spouse receives only one half the amount of the Watts Charge.
Ed: Do Watts Charges only apply to use of the family home?
Christina: Watts Charges can apply to the use of any community asset that has a significant rental value. The concept of Watts Charges could apply to one party’s post-separation use of a car. For example, if one party makes use of a community property car that is paid off after the date of separation, while the other party uses a community property car that has a large monthly car payment, then Watts Charges may apply.
Ed: If Watts Charges are determined by the fair rental value of an asset, what if my spouse and I can’t agree on the amount of the fair rental value?
Christina: Oftentimes, when you are dealing with Watts Charges, there is going to be a dispute about the amount of the fair rental value of the particular community asset involved. For example, you may need a realtor to provide evidence about the fair rental value of the family residence.
Ed: Do I need to give my spouse any warning that I intend to seek Watts Charges?
Christina: Some courts have local rules regarding Watts Charges that require you to give written notice to the other party of your intent to seek Watts Charges so the other party is not surprised at the time of trial. If you intend to assert a Watts Charge against the other party, send the other party written notice of your intent early on in the divorce process.
Ed: There are many other types of reimbursement claims that can be made. In the “Division of student loans” section of our website, we discussed reimbursement claims when community funds were used to pay for all or part of one party’s education or training. Another example: If community funds were used to pay one party’s separate debts, there can be a right of reimbursement. A discussion of all of the different types of reimbursement claims available in a divorce is beyond the scope of this video presentation. We have only gone over the most common types of reimbursement claims.
