Untangling business debt in divorce

| May 6, 2020 | Divorce, Divorce, Property Division, Property Division |

Dividing property is a major part of ending a marriage. In addition to acquiring assets, however, couples also obtain debt during their marriage. Mixing your business and personal debt can make a divorce even more complicated and should be addressed.

Spouses may assume unreasonable debt when this occurs. For example, a spouse who took out a loan on a business property to pay off personal debt that the couple accrued may end up shouldering that entire personal debt. The spouse who took out that loan can become marred in litigation when their spouse refuses to assume any of that debt.

To help avoid this problem, a spouse should use business assets only for business purposes. If it is necessary to use business assets for a collateral for a major expense, such as a home remodeling, be sure to clearly document where the loan proceeds went and whether you or your business repaid any of the loan during marriage.

Structuring business debt is also important for support obligations. Courts may consider how much money and earnings were available to the business owner instead of what they received.

For example, a business owner who does not take part of their salary to help pay off business debt may still have their entire salary attributed to them when a court calculates support payments. Paying personal expenses through the business and retaining value in the business may also be considered as income.

In determining support and attributing income to a spouse in these situations, courts will consider how expenses were paid during marriage and whether business loan payments changed in the period before divorce. Intentional income manipulation as a divorce strategy can also have serious consequences.

It is important to compare the advantages and disadvantages of structuring debt in different ways. As with all loans, it is essential to document how the proceeds were spent and who is responsible for repayment.

An attorney can help spouses plan for these contingencies. Their assistance may also help untangle finances when a couple file for divorce.