Ways Business Debt Can Affect Your California Divorce

Divorces are messy. California is a community property state which can further complicate an already complicated situation. In community property states, in general, any assets or debts accumulated during the marriage are divided evenly between the two parties with the exception of property which was acquired prior to the marriage or acquired by one party as the result of an inheritance, or a personal injury lawsuit settlement.

Business Finances Can Complicate Divorces

When there is a business involved, the entire situation becomes far more difficult: Not only are there assets which must be dealt with, but there are also business loans and other debts to deal with. This is a common problem in which the already complicated high-asset divorce becomes even more complex

The two areas in which business debt can impact a divorce include:

  • Business Loans — you may have taken a loan against your business assets to repair a roof, expand your home, or for other purposes which you believe enhance the value of a marital asset. However, this may not result in your spouse being responsible for half the debt.
  • Salary from Business — even if a portion of your salary from business is being used to repay the loan you took out for personal reasons, you may not use this reduced amount for consideration for spousal or child support obligations.

Both of these situations would result in your having higher debt following a divorce. This could result in a devastating financial picture as you move forward.

Avoiding Business Debt Problems During a Divorce

We already understand having a business can further complicate your divorce. However, there are some steps you can take to avoid being saddled with debt which should rightfully be divided between you and your spouse.  There are some steps you can take to ensure your business debt is equitably distributed during a divorce.

Avoid Commingling Personal and Business Funds

Your business funds and family funds should remain separated at all times. The only funds which should be placed in your personal accounts from a business account is your salary. In the event you borrow money using your business assets or your business you need to carefully document the use of funds.

If you are borrowing money for personal reasons, make sure you carefully document the following:

  • How much money was borrowed from your business
  • What the purpose of borrowing funds was
  • Any amounts which were repaid from personal funds

Use of Business Funds Once Divorce Proceedings Begin

Once your divorce proceedings have started, you should avoid borrowing business funds to pay for personal expenses. Doing so could jeopardize the court’s rulings on how much income you may have to acknowledge for purposes of calculating child and spousal support payments.

You should continue to draw your normal salary from your business during your divorce proceedings. The more caution you use with business funds, the less likely your expenditures are to be questioned during these proceedings.

Consult with the Appropriate Professionals

Just like you hire a skilled family law attorney to assist you with a divorce, you should also consult with a financial advisor and a tax professional when dealing with business assets and debt. In many cases, it will require the expertise of a forensic accountant to assist in determining the value of your business. Make sure you provide them with any documentation which is requested so they may set a true value for your business.

High Value Divorce Complications

Even when you and your spouse agree you can no longer share your lives together, there can be serious disagreements over how assets and liabilities are divided during a divorce. If your business is considered “sole ownership” – meaning your spouse may have no right to the assets of the business, this does not make it less complicated if you have borrowed money against your business for personal reasons.

A jointly owned business, and a solely owned business are treated in different manners for the purposes of divorce in California. In order for a business to be considered sole ownership, one of the following conditions must be met:

  • Ownership prior to marriage
  • Whether the business was inherited from another family member
  • Whether you and your spouse had a prenuptial or post-nuptial agreement

None of these factors may prevent your spouse from having a claim against the business. Some of the items which will be reviewed as part of your divorce settlement will include whether any of your family’s funds were used to grow or invest in the business, whether your spouse provided any labor support during your marriage, and whether money taken from family funds was repaid during your marriage.

Avoid Taking Risks in a High Value Divorce

Anytime there is a business involved in a divorce proceeding, the ability to have a “simple” divorce becomes impossible. You want to work with an attorney who understands what is at risk and maintain as much control as possible over your business once your divorce is finalized. You also want to avoid having business debt that could cripple you financially as you start on a new path. Working with a skilled divorce attorney who has experience handling high value divorces with a business as an asset can help you overcome some of the challenges you will be facing.

If you are in doubt regarding any financial decisions you are making during your divorce proceedings, speak with your attorney before doing anything. The courts will not look favorably upon you if there is an attempt to use personal funds for business reasons. Keep your business finances and your personal finances completely separate and make sure you do not liquidate any assets which may be considered joint property.

Contact Attorney Steven M. Bishop to schedule a consultation today. Attorney Bishop is a Certified Specialist in Family Law, he can help you from the early planning stages to the final disposition. Do not take unnecessary risks that could put you in legal jeopardy. To schedule a consultation regarding your divorce, contact Attorney Bishop at (619) 304-0418 or complete our online  contact form.


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