The Divorce Process

 

It’s More Than Just Ending a Marriage

The divorce itself is just one aspect of the divorce process (called a Dissolution of Marriage or Domestic Partnership in the state of California). In addition to this, the court is also required to divide the property and debts acquired during the marriage or domestic partnership as a part of the process.  Dividing property during a dissolution can be very complicated. There are complex rules that require the court to determine the character and value of property before dividing it. Characterization, valuation, and division are the three separate actions which occur during a divorce in order to obtain your final Judgment (often called Divorce Decree). These steps can happen separately or at the same time, such as during a settlement discussion or even at trial.

 

Character

The “character” of property is a common area of dispute. California is a community property state. That means that all assets and debts acquired during a marriage with community property money are divided when a couple decides to dissolve the marriage. Sometimes a there is a disagreement about whether the property belongs to the couple (community property) and should be divided as a part of the dissolution, or if the asset or debt belongs to only one person in the marriage because it is their separate property.

 

Valuation

Once the character of an asset or debt is agreed upon by the parties or decided by the court, the value of the property is determined. Values can be determined by professional appraisers, web-based value estimation services such as Zillow or Kelly Blue Book, or by agreement of the couple. Usually lower value items are agreed upon, mid-range assets use a service such as Kelly Blue Book, and high value assets are appraised by a professional appraiser. Occasionally there are unusual assets that are lower value but require appraisals such as professional art or assets that can range in value from nearly worthless to hundreds of thousands of dollars; for example, antiques and oriental rugs are often appraised to determine their values.

 

Division

The division happens at the end of a divorce and can become more complicated as time passes. Because of this, it is very important to disclose all of the information about assets and debts as early and accurately as possible as that will help complete your divorce as quickly as possible.

The reason that property division becomes more complicated as time passes is that there are several rules in place that allow for credits and reimbursements to be considered at the time property is divided in a divorce. Two of the more common adjustments are from Watts Charges (Marriage of Watts (1985) 171 Cal.App.3d 366) and Epstein Credits (Marriage of Epstein (1979) 24 Cal.3d 76). If you own a home, these cases can change the entire landscape of how you divide your property because if someone stays in the home and pays a mortgage, there could be thousands, tens of thousands, or even hundreds of thousands of dollars in credits or reimbursements accruing over time.

These two cases are very important in a dissolution. Specifically, in Epstein, the court said that if a person is paying on a community debt (a mortgage) with money they earned after separation (their separate property), the paying person can get reimbursement from the community. What does that mean? It means that each month you pay the mortgage, you can ask to get to be reimbursed for the half the other spouse should have been paying. These credits can accrue from the moment the separation occurs until the time the divorce is final and the property and debts are formally divided.

While that might sound great if you are paying the mortgage, the companion case of Epstein is Watts, which states that you don’t necessarily get to live in the house rent-free while your spouse pays half the mortgage. The court in Watts reasoned that if one of the spouses stays in the home while the other moves out, the spouse who remains in the home prevents the community from renting out the property. If the property were rented, it would offset the cost of the mortgage. Since one person is still living in the home and the community does not benefit, the person who remains should pay the fair market value for rent back to the community.

These two cases work together and can make a huge difference in the final division of property.

 

Let’s Take a Look at a Sample Case…

Let’s consider the marriage of Mr. and Mrs. Sample. Harry and Wanda Sample were married for 13 years. They have a child and own a home in the East Sacramento area of Sacramento County. The mortgage on the home is $2,000 per month. When the Samples decide their marriage is not working and they separate, they agree that Wanda will stay in the home with their child and Harry will move out. They agree that Harry will pay the mortgage instead of child and spousal support. Harry will visit their child every other weekend and they will split the holidays.

The Samples follow their arrangement for an entire year when Wanda decides that she wants to be divorced. She files a Petition for Dissolution in the Sacramento County Court. Wanda and Harry agree to keep the custody orders in place, they agree that Wanda should be paid $2,000 total per month in child and spousal support and they agree on the characterization and value of their property. They agree who should have what property. Great! That was easy, right? Not necessarily.

Wanda looked at the numbers and her portion of the property division was much less than Harry’s portion.  He got $60,000 more in net assets than she did. Wanda tells Harry that he should pay her $30,000 to make everything even. Harry got his retirement and some large investment accounts while Wanda got a home with a mortgage. It was not an equal division and that is not fair. Harry feels like he has been very fair to Wanda and that Wanda should not get the extra money. Harry finally consults a lawyer. Can a lawyer really help Harry? After all, equal is equal. A lawyer might be able to help. Harry and Wanda did not include the Watts Charges and Epstein Credits when they divided the property.

Harry can seek a reimbursement from the community of $1,000 per month for each month he paid the mortgage for the last 12 months (Epstein Credit). Also, the fair market rent on their 3 bedroom, 2 bath house in East Sacramento was $2,600 per month. That means that Harry can seek reimbursement of $1,300 per month for his half of the fair market rental on the property (Watts Charge). $2,300 per month for 12 months is $31,200. Harry may not owe Wanda $30,000 – she may owe Harry money.

Imagine Wanda had gone to a lawyer right away after Harry moved out and she told the lawyer what she and Harry had agreed to. A good family law lawyer would have been able to warn her about the risks of Watts Charges and Epstein Credits. Instead, the lawyer would have advised Wanda that she and Harry should file for divorce right away and make the $2,000 a court-ordered support amount. Once the payments are court ordered, Harry’s separate property earnings becomes Wanda’s separate property support payments. Now Wanda is paying the $2,000 per month mortgage with her separate property. Instead of a $2,300 per month reimbursement to Harry, she only risks a $300 per month reimbursement to Harry.

When the Samples divide their property sooner than a year after separation and Wanda tells Harry that he still owes her $30,000, the maximum reimbursement on the home for 6 months at $300 is $1,800. That means she should get at least $28,200 from Harry to make the property split equal instead of the earlier example of possibly owing Harry money after the property was divided.

But what about Wanda who might end up owing Harry money after Watts Charges and Epstein Credits? She did not know better and Harry was not paying spousal support had Harry and Wanda done things differently. Watts Charges and Epstein Credits are discretionary. The judge is not obligated to have Wanda reimburse Harry. If Harry demands reimbursements for the mortgage and fair market rent, Wanda should talk to a lawyer right away to help her with this situation.

 

Timing is Key

A few months and a small change to the facts can make a huge difference in what you might owe or receive as a settlement in your divorce. That is why it is very important to consult a lawyer with extensive family law experience.

What about spending community funds after separation but before the division of property. The answer, like most answers in family law is “It depends on the specific facts.”

If you and your spouse have a savings account where all the money in that account was earned from your employment during the marriage, that account will almost certainly be characterized as community property. Since it is a cash account, the value is the amount in the account. Half of the money at the date of separation in the account is owed to one spouse and half to other. That isn’t all that complicated so why would it be a problem to take half?

 

You Still Have Responsibilities

Even if the divorce hasn’t been filed, both you and your spouse have certain duties toward one another. Those duties extend to how you handle your community property money. Family Code section 721 defines these as a “fiduciary duty” but the code does not really help answer what that means to you. An attorney should be consulted if community property money is going to be used for a purpose that may not benefit the community. That could be a major issue later on in your divorce if you don’t take the necessary steps to properly access the funds. The fiduciary duty lasts from the day you marry your spouse until the date you receive your final Judgment (Divorce Decree) with the property division in it.

Once a divorce has been filed, there are additional restrictions beyond the fiduciary duty that take effect immediately on the party who filed. These are commonly called “Automatic Temporary Restraining Orders” or ATROs. These ATROs are found on the Family Law Summons, which is one of the required documents to get a divorce. Once the non-filing party is served with the Summons, the ATROs apply to them as well. The ATROs state, among other things, that a person cannot hide, encumber, or transfer community or separate property assets. If you use money in your joint savings account, that is transferring the money to someone else. You aren’t normally allowed to do that.

What if you need that money to pay your rent or mortgage or to hire a lawyer? There are exceptions to the ATROs to make sure that the asset is protected but that parties have limited access to their funds. You can use community property for the necessities of life such as food, housing, transportation, medical care, and other needs. Consult a lawyer if you aren’t sure if the purpose falls within the exception. The ATROs also makes an exception for funds used in the normal course of business operations if there is a business owned by the community or one of the parties to the divorce. Finally, assets can be used to hire a lawyer to assist in the divorce process. The ATROs expire when your final Judgment with property division has been entered.

 

The Time to Act is NOW

You should contact a lawyer immediately if you plan on filing for divorce or if you have been served with a divorce Petition. The rules regarding how and when you can use your property can be strict. The faster your property is divided, the sooner the fiduciary duty ends, the sooner the ATROs expire, and the quicker you can use your assets and property the way you would like them used.