Can I Be Protected From My Spouse’s Business Debt?

It’s a common concern amongst both husbands and wives that a failing business could impact them personally. If your spouse has considerable business debt, you may be asking yourself how this impacts you. It’s important to understand how business debt works in general and also how debt works in a marriage and divorce.

When your spouse’s (the same goes for both husbands and wives) business is failing it is a reasonable concern that these debts could affect the household detrimentally.

As we’ll cover in this article, you are free from liability in most cases. Here’s what you need to know.

In Florida, you are not responsible for your business debts incurred prior to the marriage. Typically, debts incurred before marriage are considered non-marital property and you would not be liable for them. Attorney Marquez Kelly can explain all the potential debts you’ll be responsible for in your divorce.

Business liabilities don’t always stay inside the company. Below are some of the most common ways business debt can become a personal obligation:

Lenders often ask a small-business owner or spouse to sign a personal guarantee for loans, leases, or lines of credit. If you sign, the creditor can pursue your personal assets (bank accounts, home, wages) if the business defaults. Cosigning has the same effect.

Using business funds for personal expenses, or depositing business income into a personal or joint account, blurs the line between company and owner. Courts or creditors can treat the business as an alter ego of the owner and reach personal assets.

Suppose an LLC or corporation is treated informally (no operating agreement, no separate bookkeeping, no distinct bank accounts, or regular use of company funds for personal expenses). In that case, a court may “pierce the corporate veil” and hold owners personally liable.

When an owner signs a contract without clearly indicating it’s on behalf of the business, or signs as an individual, courts may enforce the contract against the signer personally.

You and your spouse will be liable for any debts you entered into during the time you are married. Florida is not a community property state, you would have to sign an agreement in order for the court to hold you liable for any debts your ex incurred in his or her name only.

If your business does not offer limited liability, then this means that your spouse would also be liable for your business debts just as they would for any personal debts you share with one another. If the company was formed as an LLC, however, there is a good chance that a spouse will not be on-the-hook when it comes to business debts.

Perhaps your spouse cosigned the loan documents that state that they will help you pay back any debts if you or the company are no longer able to do this. This is especially true in community property states.

Divorce and bankruptcy is another marriage-related factor that we must take a closer look at. Any Florida attorney will likely tell you that divorce and bankruptcy should not overlap at the same time because it can turn into an overly complicated matter. Part of the divorce process is working together to split up assets. If an automatic stay is given to creditors because somebody filed for business bankruptcy, it is impossible for the courts to divide assets, which means that your divorce process will take longer amount of time than expected. This is why it is a good idea to never let the two coincide, and allow your business bankruptcy to play out if this is the option that works best for both of you. 

Attorney Marquez-Kelly provides a full range of personal and corporate services. Attorney Marquez-Kelly is a board member of the Association of Family Law Practitioners in Lee County. If you’d like to discuss your situation and learn more about your options, contact us today to schedule a consultation.

For legal queries, call Marquez Kelly-Law at 239-214-0403 or message us for a Free Half-Hour Consultation today.