“Watts Charges” And “Epstein Credits”: What They Mean To The Divorce Case

Since 2008, few sectors of the economy have been hit harder than the real estate market. In fact, Orange County residents whose homes once enjoyed hundreds of thousands of dollars in equity now find themselves breaking even with the mortgage or, worse yet, significantly upside down. Add to this toxic adjustable mortgages that place California residents in a position unable to afford their homes and you get a long line of homeowners turning over the key to the bank and walking away.

But what happens in a divorce case when that once equity rich home has turned upside down?

First, there are two very important words you will have to learn: (1) Watts Charges and (2) Epstein Credits. Not exactly household words, but in a pending Orange County divorce case, these two words can mean tens of thousands of dollars to the unwitting spouse who doesn’t plan ahead or hasn’t hired experienced OC divorce lawyers like Farzad Family Law.

Watts Charges are simply “rental” charges by one spouse against the other. Let’s say Bob and Jill become separated. Bob goes and rents an apartment while Jill continues to live at the family residence with the children. Let’s further assume the house is community property but the mortgage owed is about the same as the fair market value and, after real estate commissions, it is for all practical purposes upside down. While Jill lives at the residence, she incurs “Watts” charges. That is because Bob, who owns 1/2 of that house, is technically entitled to rent that house out and enjoy one half of that rent. However, since Jill continues to live there to Bob’s exclusion, Bob cannot rent the house out. It doesn’t matter why Bob moved out. Therefore, Jill gets hit with 1/2 of the house’s rental value. Is that fair? Not always. Jill may not have other options. She may not work, have trouble finding a job and therefore cannot afford to move out. Getting an apartment big enough for her and the children may cost as much if not more than her mortgage. So, if the fair rental value of the home on a monthly basis is $3,000.00 per month, then every single month, Bob can charge Jill $1,500.00 per month and try to recover those Watts Charges at the end of his divorce case.

Jill may say, hold on Bob, I am paying the mortgage on the house. If that is true, Jill can try and offset 1/2 of the mortgage payment from the 1/2 of the Watts Charges. That 1/2 of the mortgage is called an “Epstein” Credit. Jill gets a credit for 1/2 of every mortgage payment she makes – or does she? If she is paying the mortgage from community funds (money in a community bank account that has been there during the marriage), then she really isn’t pay for it. The community is. Bye Bye Epstein Credit. Jill has to make sure the payments are from a separate property source (for example, her income earned after her separation from Bob) or she may not get any credit at all.

The typical scenario for Jill that we see a lot now days is when the house is upside down, is headed to a short sale and foreclosure and Jill doesn’t pay the mortgage payments because “I’m going to lose the house anyway, so why pay the bank?” In that circumstance, Jill may get hit with the 1/2 Watts Charges. The worst case scenario is that Bob also pays the mortgage while Jill lives there. That means Bob gets BOTH an Esptein Credit and hits Jill with the Watts Charges. It is not uncommon for a spouse to do this informally and without a court order to lull the other spouse into a false sense of security. It goes something like this: “Honey, I am going to make the mortgage payment so long as you don’t ask the court for support so you can keep living there.” Response: “That sounds fair.” What Jill doesn’t understand is that Bob’s voluntary payment of the mortgage without a court order may not protect her because the court may not deem the payment in lieu (instead of) support.

How do you protect yourself whether you are Bob or Jim? Plan ahead. Have an experienced divorce lawyer in Orange County like Farzad Family Law actually prepare a stipulated (agreed upon) court order that both of you and the Judge sign so each of you is clear who is paying what and why. Don’t assume your spouse has your best interests at heart. Whether you are Bob or Jill, without good planning, you may find yourself on the wrong end of the law.

Got questions? We are here for you day or night. Call or email us. We are ready to help.

Warmest Regards,

B. Robert Farzad
Orange County Divorce & Family Law Attorneys
1851 E. 1st Street, Suite 1150
Santa Ana, CA 92705
Telephone: (714) 937-1193
Facsimile: (714) 937-1192

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