What Happens to Business Debt During Divorce in Michigan?

Owning a business comes with plenty of challenges, but going through a divorce can quickly become one of the greatest. As a business owner, you may worry about how your hard work will survive the separation; as the spouse of a business owner, you may wonder whether you will be held responsible for debts you did not create. How will your business debt be addressed during a divorce?

In this blog, we will cover:

• How courts classify debt as marital or separate.
• The process of tracing loans to prove ownership.
• The impact of business debt on the overall division of property.
• Strategies to protect your personal credit rating.

At Robbins & Licavoli, PLLC, our team understands these concerns. We serve clients throughout Oakland County, providing the individualized attention necessary in high-asset and business-related divorces. Our attorneys are committed to providing an honest assessment of your options.

Determining Marital vs. Separate Liability for Business Owners in Divorce

Michigan follows an “equitable distribution” model. This means courts divide property and debt fairly, though not always equally. The first step in this process is classifying the debt properly.

• Marital Debt: Generally, any debt incurred during the marriage is considered marital debt. This rule applies even if only one spouse signed for the loan, provided the debt benefited the marital estate. For business owners, loans taken out to expand a company during the marriage typically fall into this category.
• Separate Debt: Debt incurred before the marriage usually remains separate. However, exceptions exist. If you used marital funds to pay down a pre-marital business loan, the court might be inclined to treat the debt, and the business, as marital property.

Why Should You Trace Business Loans?

If you believe a specific business debt belongs solely to your spouse or is your separate responsibility to bear (perhaps to keep the business separate), you must provide evidence. Clear records showing the debt originated before the marriage or came from a non-marital source, such as an inheritance, are critical. Bank statements, loan agreements, and dated financial reports are also essential.

Tracing loans becomes difficult if you mixed business and personal funds. Courts often view commingled funds as marital property because it becomes impossible to distinguish separate assets from marital ones. Keeping a strict separation of finances is often the best way to guard separate property.

How Can Business Debt Affect Property Division?

Business debt effectively lowers the value of the business asset. When courts divide assets, they look at the net value of the marital estate. High debt levels can therefore significantly reduce the amount the non-business-owning spouse might receive.

It is common for one spouse to keep the business and the associated debt to ensure the company continues to operate smoothly. To balance this, the other spouse often receives other marital assets of equal value, such as the family home or retirement accounts.

Protecting Your Personal Credit

A crucial, often overlooked detail when addressing business debt in divorce is that third-party creditors are not bound by your divorce decree. Even if the judge orders your ex-spouse to pay a business debt, the creditor can still pursue you if your name is on the loan. Refinancing loans in the name of the business owner alone or including indemnification clauses in your divorce decree can be effective ways to protect yourself from liabilities your ex-spouse is deemed responsible for.

Preparing for Your Financial Future

Business debt, especially when it is considered a marital debt, can significantly impact your divorce case and your financial future. The attorneys at Robbins & Licavoli, PLLC have the experience to help you achieve a fair outcome in these and other challenging circumstances. Contact us today to discuss your situation.