How a Spouse can Profit by Paying Partner's Principal

Consider a counter-intuitive scenario: Before marriage, A purchases a financed house in which the spouses subsequently reside. Later, B desires a divorce, but has not told A. Substantial debt remains encumbering the house. In most cases – regardless whether marital/community funds serviced the debt – B should pay A’s debt using marital/community assets, even if B must borrow to do so. Indeed, in many cases, B should use separate property to pay A’s debt!

States, courts, and academics have long wrestled with the separate-house/separate-debt serviced-by-marital-funds scenario. While many have recognized existing formula flaws, none have proposed a workable solution. This article does. As it also demonstrates, often a non-owner-spouse can generate an enormous profit from deceiving his/her owner-spouse.

In California and Florida, all it takes is “Honey, I love you . . . let me pay your debt.” Who would not fall for that? Read on, with the hope that you will not. __________________ Many state property division formulas deal with debt payments, but none properly consider the financial, accounting, and economic consequences. Sometimes a state achieves a fair result, but more by happenstance than because of a valid economic formula. Often, state formulas reward bad decisions and punish good ones.

Some are easily manipulated by devious (well-advised?) spouses. This article suggests an Economic Reimbursement Formula for most separate debts paid with marital funds. A spouse would owe reimbursement for the payment of separate liabilities – both interest and principal – equal to the present value of prior payments. This proposal differs from existing formulas in multiple ways: • It considers both interest and principal. • It considers the timing of payments. • It provides a reasonable return to the non-debtor spouse, using a predictable measure. • It applies to secured and unsecured loans.

Additionally, the proposed formula could apply to the opposite situation: non-marital funds enhancing marital assets. The focus of the article, however, rests on the payment of separate liabilities with marital/community funds. Replying in advance to anticipated concerns: • Computations and record-keeping would be simple. • Including interest will not result in unreasonable numbers; indeed, the results will be similar to many current court-imposed results, but without the potential distortions current formulas inherently include. • Including the “return on investment” – which considers the timing of each payment – is neither complex nor unreasonable in amount.