Dealing With a Bankrupt Business During Divorce

Businesses can be lucrative assets during North Carolina divorces, but they may also be quite burdensome. A failing or bankrupt business could represent a major liability – one that neither spouse wants to touch. However, the debts associated with this failing enterprise may be unavoidable – and both spouses could be liable. Even if you had no involvement in the enterprise, you could find yourself paying for your ex’s poor business decisions. However, there are numerous potential strategies to avoid being saddled with unfair levels of debt after your divorce – and you can discuss these strategies further alongside your family law attorney in North Carolina.

Spouses should understand that both assets and liabilities may be divisible in the event of a divorce. While most focus on dividing property, many forget about the division of debts. If these debts accumulate during the marriage, they become marital property. In other words, both spouses become responsible for paying them off. In the event of a bankrupt business, this could pose a number of serious issues. Debts can spiral out of control in the business world, and creditors may turn to both spouses for repayment. This has the potential to affect your financial security for many years – even after your divorce has been resolved.

With all that said, bankruptcy courts handle liability differently depending on the specific type of business involved. Many businesses shield shareholders and owners with “limited liability.” Two of the most obvious examples include LLCs and corporations. If the business in question falls into either of these categories, it may be very difficult for creditors to seize your personal assets in the pursuit of unpaid debts. The good news is that these are two of the most common business types in North Carolina, as many entrepreneurs seek protection through the shield of limited liability.

There are other possibilities, however. A sole proprietorship offers none of these liability protections, and this is also a relatively common business type for numerous entrepreneurs. Partnerships are also common, and these businesses share liabilities between partners. Each partner may be liable for considerable debts in the event of business bankruptcy.

North Carolina’s equitable distribution system ensures at least some level of “fairness” when dividing assets during divorce. Unlike community property states that divide all assets (and liabilities) in a 50/50 manner without much thought, North Carolina takes a more nuanced approach. Family courts in the Tar Heel State consider numerous factors when dividing property during divorce – including businesses.

Family courts may ask numerous questions when approaching businesses during divorces. These might include:

• Who controlled the business?
• Who made decisions during daily operations?
• Did the controlling spouse make any poor decisions that led to its bankruptcy?
• Is there any evidence of fraud or misconduct committed by the controlling spouse?
• Did both spouses control the business?
• Why did the business fail?
• Did both spouses withdraw income from the business?
• Were both spouses aware of financial issues, fraud, regulatory problems, and so on?
• Did either spouse help or degrade the business with indirect or direct actions?

Eventually, family courts may decide that it would be unfair for both spouses to pay debts associated with the business. If the bankruptcy was solely caused by one spouse’s poor decisions, reckless spending, or outright fraud, the equitable distribution system may ensure a fair outcome. Spouses who had no role in the business’ failure may escape these liabilities.

If you find yourself saddled with your ex’s debts in the event of a divorce, various strategies can help you strive for financial security. Mediation may prove effective when dealing with complex assets like businesses, and you may be able to agree upon a fair way to handle this situation. For example, you might make certain concessions or compromises in order to wipe your hands clean of the bankrupt business. A divorce lawyer in North Carolina can help you negotiate effectively during collaborative law or mediation.

If you have been searching for a divorce lawyer in North Carolina, look no further than Arnold & Smith, PLLC. Businesses can prove to be some of the most complex assets imaginable in the event of a divorce, and online research may only provide surface-level insights on this subject. To address a bankrupt business during divorce in a confident manner, consider a consultation with us at your earliest advantage. With our assistance, you can limit the financial effects of this situation and enjoy economic security after your divorce. Reach out today to get started with an effective action plan.