How Will My Business Debts Be Handled in My Texas Divorce?

Divorce is a complicated process, and it becomes even more intricate when you own a small business. One question we frequently encounter from our clients who own small businesses is, "How will my business debts be handled in a Texas divorce?" Below, we outline some of the key points to consider.

Community Property State
Texas is a community property state, which means that most assets and debts acquired during the marriage are considered jointly owned by both spouses. This generally includes business debts unless you can prove they are separate property.

Separate vs. Community Debts

• Separate Debt: If your business was established before the marriage and you haven't commingled marital assets into the business, the debts are likely to be considered separate and not subject to division in divorce.
• Community Debt: If the business was established during the marriage or marital assets were used in the business, the debts are generally considered community debts and will be divided between both parties.

Proving Character of Debt
The burden of proving whether a debt is separate or community typically lies with the party making the claim. Detailed financial records can be a vital asset in this process. You might also need a forensic accountant to trace funds and demonstrate the nature of the debt.

Division of Debt
Debts, like assets, must be divided "just and right" in a Texas divorce. This doesn't always mean a 50/50 split. Courts consider factors like each party’s income, earning potential, and who was more responsible for incurring the debt.

Protective Measures
If you are concerned about business debts, it's important to take protective measures:

1. Prenuptial/Postnuptial Agreements: A well-drafted agreement can specify what happens to business debts in the event of a divorce.
2. Business Structure: Structuring your business as a corporation or LLC can sometimes protect personal assets from business debts, although it's not foolproof.

Consult an Expert
This is a complicated area of divorce law, especially when a small business is involved. If you have questions about your own situation, consult with a divorce attorney who understands both family law and business financials to get tailored advice.
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Divorce is a challenging time, but understanding how business debts are handled can remove some of the uncertainty. Take steps to protect your interests and consult professionals to navigate this complex landscape.

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