Commercial debt in divorce: what you need to know

If you are a married business owner, the debt associated with your business could become a point of contention in the event of a divorce. Here is a typical example:

You take out a loan, borrowing against real estate owned by your business, to pay for family expenses. In the event of divorce, you argue that this loan of $ 500,000 must be repaid with the marital property because it was used for family purposes. Your spouse says, “This is your business debt and it has nothing to do with me. Whether your spouse is legitimately unaware of the loan or chooses to twist the situation, it will be up to you to determine how the loan proceeds were used. If you don’t, you could end up alone with that half a million in debt.

Another potential circumstance is that you have taken a lower salary from the business than before in order to direct some of the business’s income to business debt (for example, to pay it off faster) and those overpayments to debt. otherwise commercial debt would have come to you as a distribution. Once your divorce begins, you may be ordered to pay your spouse an amount of alimony based on a distribution you received before increasing your monthly loan payment, making your cash flow tight and forcing you to take a paycheck. higher. As a result, you can’t pay off that debt as easily as before.

While your debt situation can get complicated in the event of a divorce, here are some basic things to consider during your marriage to put yourself in a more favorable position in the event of a divorce:

Use company assets and resources only for business purposes, not personal use. It can be extremely difficult to disentangle your business and personal finances at the time of divorce if you have used the income from the business to pay for personal expenses.

Since it may be necessary in some cases to use your business assets as collateral for a personal loan (for a home improvement or other major family expense, for example), be sure to document make it clear where the loan proceeds went, and whether you or the business repaid any part of that loan during the marriage. Preferably, you should ask your spouse to agree in writing (for example, in a post-nuptial agreement) how you plan to use the loan proceeds and that the loan on behalf of the business is in fact for your personal benefit. and that of your spouse. .

If you haven’t been careful to keep your personal and business money separate and you are getting divorced, consider hiring a forensic accountant (the sooner the better) to track and document what was done with any debt incurred by your business. for a non-company. goal. Why not do it yourself or with the help of your lawyer? In the eyes of the court, a report that you generate yourself will not have the same weight as a report prepared by an expert. And the forensic accountant is probably a more cost effective option than your lawyer because their expertise in this area allows them to create reports more efficiently and at a lower cost.

When determining your maintenance obligations, the court will not necessarily share your views on how you reserve the money at your disposal and may consider that you have more income than you realize. For example, maybe you define your income as the amount you pay yourself even though there is additional business income that might be distributed to you that you have instead chosen to keep in the business or to pay more than the minimum. required for commercial debt service. Courts may consider the total amount of money you have available to include income that you do not distribute yourself. When you have the opportunity to control the allocation of funds, the court may charge you a higher income. This will depend on how you paid the expenses during the marriage, whether the amount of your payment changed before your divorce, and whether the court finds that you engaged in intentional manipulation of your income as part of the planning for the marriage. divorced.

As an example, suppose the business has $ 500,000 per year to pay you, but as the business owner you decide to use $ 150,000 of that amount to pay off excess business debt. each year and only take $ 350,000 as income. The court may charge you the full $ 500,000 when determining spousal or child support. Likewise, the court has the ability to consider whether you are paying personal expenses through the business that should be charged to you as income, and whether you retain any value in the business that should be paid to you as income. income. They can determine your level of support obligation based on your income could be rather than what they are.

When it comes to corporate debt, it’s always important to think ahead, weigh the benefits as well as the potential consequences of structuring debt the way you do, and documenting as you go. let it never be a question of where the money was spent and who is responsible for paying it back.

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