Help! Am I Responsible for a Spouse’s Business Debts?

Remember those commercials with the spokesman telling you to protect your personal assets when starting a business? “Incorporate your business today!” said the spokesman.

It may have seemed like a gimmick, but one of the purposes behind incorporation is to create a business that is separate and distinct from your personal life and assets. Not all businesses are successful and if the business doesn’t succeed, you don’t want to put your entire personal life on the line, too.

If one spouse starts a business, there are three common business forms that are used: corporations, partnerships and sole proprietorships.

With a corporation, the business assets and debts are owned by the corporation, not the individual owners, or shareholders.

For a partnership and a sole proprietorship, the assets and debts of the business are the assets and debts of the owner or owners.

So, how is a spouse responsible for the business debts of the other spouse?

Responsibility for business debts does not arise simply because of marriage. There are a few general methods by which a creditor can get to the non-business-owning spouse. First, it is quite common in today’s business climate for creditors to require that both spouses sign personal guarantees for business credit.

Many creditors that offer open accounts to their customers want additional security for selling goods on a credit basis. Particularly with a new business that has no established customers and credit, the creditor may not be so willing to offer credit without personal guarantees.

At some point during the business relationship, once the business is established, the non-owner spouse may be released from the guaranty. But, the guarantees are often forgotten once given to the creditor and the spouse’s liability only comes to light later if the account is not paid by the business-owning spouse.

If the business-owning spouse operates as a sole proprietorship or signs a personal guaranty and debts are not paid, the personal assets of the business-owning spouse are now at risk if the creditor obtains a judgment against the spouse. Judgments can attach as liens against personal property owned by both spouses, but not generally with real property, depending on the circumstances.

Thus, a creditor may be able to get to marital assets with a judgment. A similar result can occur if the business-owning spouse operates as a partnership. The debts of the partnership are also the debts of the partner-owners. A creditor would have to obtain a judgment on a debt first before having access to assets held by spouses.

Remember that this does not mean that the non-business spouse is responsible for the debt, only that the creditor may have access to marital assets.

Determining a non-business spouse’s exposure to business debts is not always clear at first glance. There are exceptions and other ways in which creditors may attempt to hold the non-business spouse liable to have a greater chance at collecting a debt.

When forming a business, or dealing with business debt, the full picture can be provided by an experienced attorney. Consult with Kurtz Law, PLLC for sound business advice!