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Rombro & Manley LLP

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Can business debt also be marital debt?

On Behalf of | Nov 17, 2020 | Property Division

Many business owners in California have to take out loans on occasion to keep their companies up, running and growing. Generally, the repayment of these loans comes through company funds. However, there are cases where one uses business debt for personal reasons or pays it back with what would normally be take-home pay. In these cases, business debt can also be marital debt, which can cause some issues if divorce ever enters the picture.

California is a community property state. That means that any assets, positive or negative, acquired during a marriage belong to both spouses unless the property specifically identifies as separate property. In a divorce, both parties have the right to a share of the community property.

For the spouse of a business owner

If you are the spouse of a business owner, the fact that you could have to repay his or her business debt may seem horribly unfair. The only way to prevent this from happening is to:

  • Stay on top of marital finances
  • Know where every cent is coming from
  • Know where every cent is going

The problem is, not everyone takes such an active role in managing marital finances. If your spouse claims that business debt is marital, know that he or she has to prove that the funds were used for personal reasons. The burden of tracking the funds is on them. If he or she can do that, yes, you may have to pay back a portion of the debt.

For the business owner

The best thing business owners can do is keep their business and personal finances separate. If company funds and personal funds become intertwined, keep track of where the money is going. It is also wise to maintain a standard income level. If one year you take home less than the year before in order to pay down business debt, the difference in your income level could work against you, as it would normally be marital property. This could cost you a lot in the end.

Fight for a fair divorce settlement

Achieving a property division settlement that satisfies both parties can be a challenge — particularly when there is a difference of opinion on what is a marital debt or asset. With the right assistance, you can identify your shared assets and negotiate or fight for fair settlement terms.