Frequently, divorcing couples agree to divide property pursuant to a settlement agreement. Often, one of the parties is obligated to pay the other party an “equalizing payment.” The equalizing payment is the means by which both parties leave the marriage with substantially equal assets. Property division pursuant to a divorce agreement is a non-taxable event and, therefore, the party receiving the equalizing payment will not need to pay taxes on the amount received.
Equalizing Payment Pitfalls
Many times, an the parties agree to the equalizing payment being paid in installments over time. While this may be a convenient method of making a significant payment in comes with some pitfalls for the recipient party.
- The payment(s) do not survive bankruptcy.
The party who is to receive the equalizing payment should consult with counsel to determine the best way to protect the equalizing payment in the event that the payor files for bankruptcy and seeks to discharge the equalizing payment pursuant to the bankruptcy.
- Lack of payment on schedule causes unwanted attorney’s fees and costs.
If the payor does not make timely payments, the recipient would have to file an action with the court to enforce the terms of the agreement. This can be costly. Also, if the payor simply does not have the money to make the payments, an enforcement action may have little economic gain.
- The recipient does not have the benefit of the funds at the time of the divorce.
If a payment plan is agreed upon, the recipient of the equalizing payment does not get the benefit of the funds until all of the equalizing payments are made. This deprives the recipient of the ability to use, invest of receive interest on the funds.
There are ways to protect against some the pitfalls described above.
- Consider agreeing to a support order that is not dischargeable in bankruptcy.
- Require a deed of trust against real property assigned to the payor. The deed of trust should secure the entire amount of the equalizing payment.
- Require interest to be paid on installment payments until paid in full.
- Specify remedies for failure to timely pay (i.e. sale of property, liquidation of
- If bankruptcy seems like a possibility, consult with a bankruptcy attorney.
It is very important to consider all the ramifications of property settlement prior to signing a divorce and property settlement. The information provided above is just a general overview of some of the issues that can arise. Each situation is unique and needs an independent evaluation of the terms of the settlement agreement to determine the best way to secure a property settlement.
Often, couples who are newly separated do not understand their obligations and rights regarding payment of the “family home” expenses. The law regarding payment of “joint expenses” post-separation is not intuitive and can feel unfair to the person who is left in the family home. That is because, under California law, the person left in the “family home” is responsible for all costs associated with the “family home” and could owe the spouse who is no longer residing in the home one-half the rental value of the “family home” even if the other spouse voluntarily chose to move out of the family home. Spouses rights and obligations regarding post-separation use of the family home and payment of community expenses with separate property are defined by two seminal cases, In re Marriage of Watts (1985) 171 Cal.App.3d 366 (“Watts”) and In re Marriage of Epstein (1979) 24 Cal.3d 76 (“Epstein”).
Do I really have to pay my ex-spouse one-half of the rental value of my home?
Pursuant to the holding in the Watts case, a spouse who remains in the family home may have to pay one-half of the net fair rental value of the home to the spouse who no longer lives in the family home (“the out spouse”). The right of the out spouse to recover one-half of the net rental value begins to accrue at the date the out spouse moves out of the home and continues until the community no longer has an interest in the home. Reimbursement of the fair rental value is not mandatory, but rather, the court has the discretion to order reimbursement for the reasonable use of the family home and should balance the equities in the case in determining whether to award one-half the rental value.
Do I really have to pay my ex-spouse for all the payments he made toward our joint debts?
Pursuant to the holding in the Epstein case, a spouse who, after the date of separation, uses earnings or other separate funds to pay preexisting community debt should be reimbursed for such payments from the community unless the payments of preexisting community debts constituted a discharge of the paying spouse’s duty to pay support to the other spouse. Any reimbursement for post-separation payment of community debts lies within the discretion of the trial court and is not mandatory.
How do I protect myself against fair rental value and reimbursement claims?
The best practice is to establish an agreement early on (i.e. before either spouse moves out of the house or as soon as possible after one spouse moves out) as to the use of the home and how the rental value will be treated at the time of dissolution. To avoid the risk of a reimbursement issue, it is best to agree on how community debts will be paid post-separation and to establish support orders either prior to separation or as soon after separation as practicable.
Are you going through a divorce and want to do it in a way that minimizes the anxiety, emotional turmoil and expense? If so, mediation is the right option of you.
Mediation is an alternative dispute resolution process that both parties agree to participate in rather than proceeding through the “court process” which requires the court to decide how to divide property, draft a parenting plan, and establish spousal and child support orders. During the course of the mediation, the parties will meet with the mediator to develop child custody parenting plans, divide assets, establish temporary support or income sharing arrangements and assist the parties in obtaining information from each other that is critical to the resolution of the divorce. As agreements are reached, the mediator memorializes the agreements in writing so that each party has an opportunity to review the terms with counsel prior to signing the documents.
Generally, it is recommended that each party consult with independent counsel to ensure that each party is comfortable with the terms of the agreement and that they fully understand the rights that they have with respect to the agreement. Though each party may consult with independent counsel, the cost associated with mediation is generally much lower than proceeding with court intervention where independent counsel is much more heavily involved.
Mediation allows you and your soon to be former spouse to control the outcome of your case rather than letting the court control the outcome. It also allows you openly and freely discuss issues that arise without fear that what is said in mediation will be used against you as the process is confidential. Thus, if you want a safe place to control the outcome of your divorce, mediation is the right choice for you.
Learn more about Mediation